What You Need to Know about Equity ReleaseJames Trafford
If certain criteria are met, such as age restrictions and financial status, equity release allows homeowners to gain access to money that is tied up in their property. Moreover, it will also allow the homeowner to continue living in their home without having to move elsewhere.
Here are a few examples to demonstrate the value of homeownership equity. If your house has a value of £300,000 with £75,000 left to pay on the mortgage, then you would have an equity of £225,000. Or if the mortgage had been paid off in full, then the equity would be £300,000.
Negative equity, on the other hand, is where the remaining mortgage owed is higher than the value of the house. In negative equity, there is no positive equity that can be released.
What is an equity release?
Applicants for negative equity must be aged over 55 – or for the home reversion scheme, you must be over 65. The released equity can choose to receive the money over time with a number of instalments, or they can have it all in one go as a lump sum. An important aspect of understanding equity release is to realise that it isn’t necessary to have paid off your mortgage.
As indicated above, the potential equity release from your home can be calculated by taking the value of the house and subtracting what’s left to pay on it. If you are thinking of releasing equity from your home, it’s important to note that, even if your home has increased significantly in value over the years, as many have done in the UK, you will unlikely receive the highest possible market value when releasing equity from your home.
There are two kinds of equity release available:
- Lifetime mortgage – taking out a loan against your home
- Home reversion scheme – selling part or all the home
Statistical data released by the Equity Release Council shows that (2018 data)
- Lifetime mortgage equity release accounted for 65%
- Home reversion schemes accounted for only 1%
- Lump sum plans accounted for 34%
Lifetime mortgage equity release
This equity release scheme is by far the most popular one of choice. The lifetime mortgage equity scheme allows successful applicants to borrow an amount based upon the property’s value at a fixed or capped interest rate. The money borrowed is only paid back once the homeowner has died or when they move to a retirement or care home on a permanent basis.
Beneficiaries of the lifetime mortgage will have the stability and assurance of continuing to own their own home. Naturally, many homeowners with children will want to leave some of the home’s equity for their children’s inheritance, so they can do this by ring-fencing a portion of the property’s value to remain secure for their children.
To qualify for this equity release, you must be over 55 years old. Typically, because no repayments are made, the interest owed will accumulate over time and then be deducted from the estate upon either death or going into a care home.
Home reversion scheme
The home reversion scheme is regulated by the financial conduct authority (FCA) and allows applicants to free up equity in property to fund care at a later date, which is why you must be at least 65 years old to qualify.
This scheme involves selling either part of the whole home but for less than the full market value potential. You can opt to either receive the money in one tax-free lump sum or in instalments. Those that choose this equity release scheme cannot sell their property until the time they either die or move into a care home. Another benefit of this scheme is that you can live in your home rent-free through a lease.
What is the price tag?
The cost of equity release will depend on various factors, including the type of scheme you opt for and the lender you choose. The average scheme will cost between £1,500 and £3,000, and the fees are for the following services needed to secure the equity release.
Lifetime mortgage scheme fees:
- An arrangement: fee is paid up front, like a regular mortgage.
- Financial advisor: The financial advisor fee can usually be paid either upfront or added to the cost of the loan.
- Valuation fee: This fee will cover the cost of the chartered surveyor.
- Legal fee: The services of a solicitor will b required to handle the legal aspects of the mortgage arrangement.
- Interest rate: Interest rates for this scheme will be between 3% and 5%. Note that even with the cheapest rate of 3%, this is still higher than with a standard mortgage rate interest.
- Arrangement fee: This fee will be due to the lender.
- Legal fees: due at the end of the process, it is best to hire your own solicit and not use the one provided by the lender.
- Financial advisor: Typically paid upfront, this will be paid to the provider to set up the scheme and to cover specialist advice.
- Valuation fee: This fee is for the surveyor to carry out a valuation of the property to establish how much you can borrow from the scheme.
Is equity release the right route to take?
To qualify for an equity release scheme, you will need to be aged over 55 and own property in the UK that is valued at least £70,000.
Depending on your circumstances and financial health, equity release can have many advantages. For starters, it can help provide for a more comfortable retirement by topping up your pension income. Furthermore, you won’t have to downsize your property.
The terms and conditions governing each scheme will vary depending on the provider, so you will need to speak with an advisor to see what they are. Conditions may include the following:
- You must borrow at least £15,000 to be eligible.
- You must have paid off your mortgage completely – or have a small mortgage to pay off.
- You must live in your home permanently.
For homeowners with a large number of children, you will have to consider that the more taken out in equity release, the less there will be left for inheritance for your children. Of course, it is strongly recommended that you speak with a financial advisor who can go over all the details with you and advise you on what is best based on your personal circumstances and preferences.
A quick recap on the advantages and drawbacks of equity release in your home.
- The money you get through the release scheme is tax-free.
- You can continue living in your home without having to downsize.
- No monthly repayments are needed.
- Lower your chances of repossession if you follow all the terms and conditions.
- Guarantee of no negative equity.
- No worries about owing more than the value of the property.
- Higher interest rates compared to standard mortgage rates.
- Interest rates will increase the debt owed.
- An early exit fee could be charged.
- Your property cannot be left as an inheritance.
- The below market price offered for your property is standard.
- A lifetime mortgage is a long-term commitment with a sever early charge if exited early.