Equity release is a specialist sub-sector of the financial services industry that has significantly matured in the last decade or so.
While the concept was once viewed with suspicion, today’s products offer a credible path for unlocking money tied up in your home, providing a useful cash sum to use as you wish.
For homeowners aged 55 or over who may be affected by the ongoing changes to the way state pensions are being calculated, or worried over endowment mortgage repayments, equity release may serve as the perfect financial vehicle to enhance a longer, happier retirement life.
So, how does it work, and when is equity release the right decision? What are the pros and cons and who should you turn to for professional guidance? Let’s take a closer look.
What is an equity release mortgage?
If you have sufficient equity in your own home and are aged 55+, you may be eligible for a Lifetime Mortgage. Any existing mortgage can be repaid with the equity thus released, so the property doesn’t have to be owned outright.
Interest is charged, rolled up and added to the original loan, which is repaid once your home is sold (either when you go into permanent care or upon death).
Interest rates are higher than those for standard residential mortgages because lenders are having to potentially wait a long time to recoup their money, and there’s a risk that the property will always be worth more than the mortgage.
Interestingly, equity release rates are at their lowest ever at the time of writing in April 2021, starting from 2.78% AER and the rates are fixed for the duration of the loan. This compares to normal residential rates of around 2%-4% at present.
How can the funds be used?
The money released via a Lifetime Mortgage can be used in any way you please. Whether you are looking to provide financial help to other members of the family, planning a luxury holiday or a major home improvement, or simply want to increase your retirement income, equity release can be an excellent way to achieve your goals.
An equity release mortgage unlocks tax free cash from your home while you carry on living there and without having to worry about making monthly repayments.
If you wish, or your circumstances change, you can repay an equity release loan at any time (subject to admin fees or early repayment charges) and you can even move house, depending on the outstanding loan and the value of the new property.
Is equity release safe?
Regulated by the Financial Conduct Authority (FCA) and monitored by the Equity Release Council (ERC), you can have full peace of mind that the rules and safeguards ensure you continue to own your home and have the flexibility to move, should you so wish.
All FAC and ERC governed Lifetime Mortgage are sold with a No Negative Equity Guarantee, meaning you will never owe more than your property is worth.
The Equity Release Council also has a strict code of conduct on the sales process, which stipulates that you must have received professional financial advice and independent legal advice before you are authorised to take out a loan.
All Lifetime Mortgage companies in the UK are ERC members and FCA regulated, and you are strongly advised to only take professional advice from a full qualified equity release specialist who is a member of the Equity Release Council.
Will my inheritance be affected?
Given the fact that your home is likely to be your biggest asset, it is reasonable to query the impact of an equity release mortgage on your family and their inheritance. Thankfully, with a No Negative Equity Guarantee, your heirs will never inherit debt on the property.
Of course, the outstanding Lifetime Mortgage will need to be repaid from the proceeds of the sale of the property, after which any remaining equity will then be paid to your children.
Some equity release schemes allow you to protect a percentage of the value of your property, thereby guaranteeing an inheritance.
The decision to take out an equity release loan can have long-term implications, which is why you must do two things: speak to a professional who can help you compare available schemes and guide you towards the best choice for your needs, and involve your family in the decision-making process, since they will ultimately be affected financially.
Equity release is a complex and sensitive area that will suit some elderly homeowners more than others. Whether the pros outweigh the cons will depend on your personal situation – it is not a one-size-fits-all approach.
The key to making the right decision is to understand what’s involved, working with an independent equity release specialist to get the right solution for your needs.