The first four questions you need to ask about Equity Release
What are the different types of Equity Release I can have?
The most common type of Equity Release Plan is a “Lifetime Mortgage” which, like all forms of mortgage is a loan against the value of the property.
Unlike other more conventional mortgages though, the loan does not have to be repaid until the borrower dies or moves into permanent long term residential care.
As there are no monthly repayments, the interest is rolled up and added to the original loan amount. Eventually, at the end of the plan, the lender is repaid both the original loan plus the rolled up interest from the sale of the property.
The amount of cash that can be released is dependant on age as well as property value. The reason for this being that the younger a plan is taken, the longer the interest will roll up. It is crucial that you understand this and talk through how this works. A personal illustration made specifically for you is the best way of seeing how this roll up of interest will affect you.
There are several variations of this style of Equity Release that can allow further borrowing or monthly repayments during the life of the loan.
At what age can you take out an Equity Release Plan?
Typically, these plans are available to people age 55 and above.
If you are entering the arrangement as a couple then the youngest must be 55 or above.
The amount you can borrow is a percentage of the value of the house. Each plan provider is slightly different, but the basic concept is that the percentage you can borrow increases as you get older.
Such plans are designed to be repaid on death, or taking permanent residence in a care home. With this in mind, someone entering an Equity Release arrangement at age 55 should understand that if they live to 100, then the plan will last or 45 years. Something to think about considering the mortgage that was probably used to but the property in the first place was over a 25 year term.
Is my property suitable for Equity Release?
Not all properties are eligible as security for these plans. Here are the most common rules that apply as of 2020:
- The property must be owned by you and be in the UK. This property must be your main residence and occupied by you. If you are a couple, but the property is in just one name, then it may need to be transferred into both names before proceeding. There are some lenders who will accept single name applications for couples, but this restricts your product choices. You must ask your adviser to explain the legal consequences of single name applications.
If the property is leasehold, then the remaining term of the lease must be over a certain number of years. Different providers have different rules.
Just like any mortgage, the proposed lender will have their own criteria regarding the construction, age and minimum value for the property. If you have a 400 year old, cob built house worth £80,000, you are going to find that the market is somewhat smaller than if you have a 50 year old standard built property worth £300,000.
You will need to use the money you borrow or “release” to pay off any existing mortgage or loan secured on the property immediately. You are then free to use whatever money is left over for your other financial needs.
Your property must be in a reasonable condition.
Are Equity Release plans regulated?
Yes, like residential mortgages, Equity Release products, providers, and advisers are regulated by The Financial Conduct Authority (FCA).
Advisers for Equity Release have to be qualified, and in addition to taking exams they have to show that their knowledge is up to date and of a certain standard.
In the FCA’s own words, taken from its own website, a purpose of the FCA is to ensure that “Financial markets need to be honest, fair and effective so that consumers get a fair deal”.
In the event of any complaint you may have, it is the Financial Ombudsman Service you can turn to for help if you are unable to reach a satisfactory conclusion with the company you are in dispute with.
Although not a regulator, the Equity Release Council is the representative trade body for the UK equity release sector with over 400 member firms and nearly 1,200 individuals registered, including providers, funders, regulated financial advisers, solicitors, surveyors, and other professionals.
It leads a consumer-focused UK based equity release market by setting authoritative standards and safeguards for the trusted provision of advice and products. Since 1991, over 500,000 homeowners have accessed over £29bn of housing wealth via Council members to support their finances.
Members of the ERC agree to a Statement of Principles which highlight a number of safeguards for consumers.
You are well advised to seek out the best qualified and experienced people to help you make your decision.
To understand the features and risks of a Lifetime Mortgage, please ask for a personalised illustration.