Equity release is the way for people over 55 in the UK to get money from their home while still living in it. People generally use it to boost retirement income, pay debts, support family, or fund major expenses like home improvements or care.
Getting an equity release may seem logical in some ways; however, there are some drawbacks related to it. In this article, we briefly discuss what equity release in the UK is, its types, and how it works.
Equity Release in the UK Explained
You can think of equity release as a type of mortgage. Through it, you just get the lump sum money tied up in the value of your house.
While getting this mortgage, you can continue living in your home. If you pass away or enter long-term care, the repayment can be done through the sale of your house.
However, equity release is not without risks, so it is essential to consult a qualified financial adviser or mortgage specialist before the process.
Example of Equity Release
Now that we have covered equity release’s definition in basic terms, it is time to learn it in practice.
Let’s say you are 68 and live alone in a house in London that you owned for 30 years. Its current worth is £400,000. This money is tied up in the property. Now, although your pension covers the basics, you want to renovate your kitchen and help your granddaughter with university fees.
After speaking to a specialist equity release adviser, you decide to take out a lifetime mortgage, a type of equity release. Accordingly, you borrow £60,000 against your home. However, you do not have to make monthly payments.
Instead, your interest is added to the loan, and it will be repaid when your home is sold.
Types of Equity Release
When someone asks, “What is equity release?”, the first three types that come to mind:
1. Home Reversion Plan
The home reversion equity release plan is generally offered for those aged 60 or above. This involves selling all parts of your property to an equity release provider company.
In the meantime, you can continue staying in your home without paying rent. However, you are no longer the owner of the house. Besides, no interest rate is charged in the home reversion plan as it is considered a sale, not a loan.
2. Lifetime Mortgage Plan
Lifetime mortgage products, also known as LTMs, are loans available from age 55 onwards. Within this equity release type, you can decide to pay all, some, or none of the interest rate monthly. However, note that the unpaid interest rate is added to the total loan balance.
3. Payment Term Lifetime Mortgages
Payment terms for lifetime mortgages, also called PLTM, are designed for people aged 50 and over. The process begins with a phase where you make regular interest payments, usually until the oldest borrower reaches 75.
After this, your mortgage switches to a standard lifetime mortgage. Besides, your mortgage interest rate is added to the loan instead of being paid monthly. If your payments are not maintained during the initial phase, your home could be taken by the lender.
Further Advice: Which Option Should You Choose?
If you are asking, “Which equity release option should I go for?”, the answer depends on your personal needs and goals.
If you want to keep ownership and borrow against your home, LTMs or PTLMs’ equity release plans might suit you. But if you are open to selling part of your property, home reversion could be a better fit.
Of course, equity release is not your only route. You might find that remortgaging or downsizing works just as well. Therefore, it is always wise to speak to get equity release advice before making any decisions.
Who is Eligible for Equity Release?
Each equity release product has its eligibility criteria. Thus, you have to look for which one is best for you before making a final decision.
Here is a basic table that shows equity release mortgage eligibility criteria:
| Feature | Payment Term Lifetime Mortgage (PTLM) | Lifetime Mortgage (LTM) | Home Reversion |
| Minimum Age | 50+ | 55+ | 60+ |
| Affordability Check Required? | Yes | No | No |
| Home Ownership Requirement | Own or buy your home, with little or no mortgage | Own your home | Own your home |
| Typical Minimum Property Value | Around £70,000 to £100,000, depending on the property and plan | At least £70,000 | Varies |
| Amount You Can Access | Usually from £10,000 upwards | Between 25% and 100% of your home’s value | Depends on the share of the home sold |
How Does Equity Release Work?
Equity release lets you access money tied up in your home in two main ways:
- Lifetime mortgage
- Home reversion plan
In a lifetime mortgage, you take a loan secured against your property. For instance, you can borrow £50,000 now and live in your home as usual. Your interest rates will be charged on the loan and depending on your existing mortgage plan. You can either pay the interest each month or let it add up over time.
If you do not pay the interest monthly, the amount you owe grows. It is usually paid back when you pass away or move into long-term care.
In a home reversion plan, you sell a share of your home or the whole property to an equity release lender. You keep living in your house rent-free. However, if you die or move into long-term care, the provider gets their share based on your equity release agreement.
Once you make your decision, you can take the money all at once or in smaller payments over time. Keep in mind that if you get money from equity release, it could change the amount of government benefits you qualify for.
Most equity release plans include a “No Negative Equity Guarantee.” This means you will never owe more than your property’s worth, even if interest builds up. However, this does not cover missed monthly interest payments on some types of lifetime mortgages, so it’s important to stay on top of any payments if required.
How Much Equity Release Can I Borrow?
Minimum equity rate for a lifetime mortgage typically starts from £10,000. If your plan lets you take extra payments over time, each one is usually a minimum of £1,000. However, this can change depending on your equity release provider.
On the other hand, you can decide how much to sell, from 25% up to the full value of your home if you take the home reversion path.
Nevertheless, there is no fixed maximum amount you can release; it depends on factors like your age, your property’s value, and the equity release product. Therefore, it’s better to use the Equity Release Calculator.
Equity Release Council Standards
The Equity Release Council (ERC) is the main organisation that sets high standards and protects customers when it comes to equity release. Therefore, you must be sure your provider is a member of it.
Advantages of Equity Release
- Access the money through the value of your home without moving
- No monthly repayments needed (for most plans)
- You can stay living in your home
- Protects against owing more than your home’s value (No Negative Equity Guarantee)
- Flexible options to suit different needs
Downsides of Equity Release
- Reduces the inheritance you leave behind
- Interest can build up over time, increasing the loan amount
- May affect eligibility for some benefits
- Early repayment fees can be high
- Not suitable for everyone, as professional advice is essential
How to Find the Best Equity Release Adviser?
Equity release advisors explain your options and guide you toward the best choice for your situation. At this point, you might ask yourself, “How to choose an equity release advisor?”
First things first, when speaking to an adviser, ask about:
- Their fees and any additional costs, like legal or valuation fees
- Whether they consider all providers in the market
- What types of equity release products do they offer
You can control qualified equity release advisers through the ERC. They follow strict rules, including:
- Assurance that you can remain in your home for life or until you enter long-term care.
- A guarantee that you will not owe more than the property’s value
- Fixed interest rates to protect you from unexpected increases
Accordingly, they need to tell you if any lender they recommend does not meet these standards and explain the associated risks.
Plus, always confirm your adviser is authorized and regulated by the FCA.
FAQs on Equity Release
What is the age limit for equity release?
The minimum age for equity release is usually 55 for lifetime mortgages and around 60 for home reversion plans.
Can an equity release lender refuse your application?
Due to several factors, your lender can refuse your equity release application. They can reject if they find any undisclosed negative credit history or financial problems during their assessment.
Is equity release tax-free?
Yes, the money you get from equity release is generally tax-free because it is considered a loan or sale of your home share, not income.
Can I lose your house with an equity release?
With equity release, you won’t lose your home as long as you follow the terms of the agreement. You can stay living in your house for life or until you move into long-term care. However, if you do not follow the terms, there is a risk that your lender can take possession of your property.
Can I pay off my parents’ equity release?
The loan is usually repaid by selling the home, but heirs can pay it off in other ways if they prefer to keep the property.
