What is Equity Release & How Does It Work? – Important Tips on Equity Release

Well if you are 55 and a UK resident with your own property there then Equity Release can be an option to utilize the money involved in your property. Equity release is a process you take money against the value of your property. It can be taken at once as a lump sum or in installments.

So, in case if you fall short of money in your post retirement years or are struck with a sudden expense, equity release can be your savior. It gives you immediate access to the wealth you have accrued in your property. The best thing about equity release is you don’t even have to move out from your property.

But though it may sound interesting now but do your research well to understand if you are prepared enough for such an expensive lifetime commitment. Because in equity release there’s no going back, which means even if you decide to back off from the plan, there is hardly any option out. So, if you are deciding on opting for equity release, ensure you try to grab a better deal right after the replacement charge period ends. And the best time for it is when the rate of interest is really low.

Types of Equity Release

Majorly Equity Release is divided into two processes- Lifetime Mortgage and Home Reversion.

Lifetime Mortgage

This is the most preferred equity release plan. Under this plan you get a loan secured against your property which is a tax-free amount. The best part about this plan is there is hardly any repayment during your lifetime while you maintain your 100% ownership of the property. Not only this, if you wish to, you can encircle a portion of your property as a heritage for our family. What happens actually is, in Lifetime Mortgage you take a lump sum amount and the interest keeps rolling up or you can say the compound interest is added to the capital amount. Although you can keep repaying the interests that is solely to your discretion. But in Lifetime Mortgage depending on your age, you can easily release 18% to 50% of the total property worth. This entire amount is repaid when your property is sold after you shift to a long term care or you pass away. Before considering a lifetime mortgage, it is necessary for you to know a few important aspects of this plan.

• The age eligibility to opt for a lifetime mortgage is minimum 55.
• The total amount you can borrow against the value of your property is 60% of the net worth.
• Although your age and medical conditions can have a key role to play. Like if you are likely to be more unfit then the lump sum amount may be larger compared to any other situation.
• In this plan normally the interest amount is fixed for the lifetime. If in any case it is a variable interest then usually there is a cap as per the Equity Release Council standard.
• As per this plan you are eligible to stay in your property for your lifetime considering the property remains your main residence.
• One of the amazing aspect of this plan is its ‘no negative equity guarantee’. As per this clause, neither you nor your estate is responsible to pay any remaining loan, if the amount drawn from selling your property doesn’t suffice the outstanding amount after making all the payments to the property agent and solicitor.
• Depending on your lender’s acceptance, you can shift to a different property without hampering your equity release loan.
• The lifetime mortgage is a very costly plan. If you are capable of repaying the interests then may be the mortgage will cost less compared to no or partial payment of interest. But your monthly installment will be dependent on your monthly income and your eligibility to pay these installments will be cross checked by your providers.
• You can withdraw your equity as per your requirement. It can be in installments or altogether. But the benefit of smaller installments is the rate of interest is payable only on the amount withdrawn. Therefore, it’s a smart decision to withdraw minimum amount.

Lifetime Mortgage is further sub divided into a few more categories

• Drawdown Lifetime Mortgage is a flexible version of the Lifetime mortgage plan. In this case you can withdraw equity in smaller amounts as per your requirements. The benefit of this mortgage plan is that the interest is payable only on the amount withdrawn. So, while you maintain your 100% ownership of the property your overall mortgage cost is reduced to a great extent.
• Enhanced Lifetime Mortgage is a specially designed plan that’s beneficial for those with a medical condition. In this case, your provider releases a heftier amount compared to a normal lifetime mortgage.
• Protected Lifetime Mortgage allows you to ensure a particular percentage of the net worth of your property is being passed on to your family as a heritage.
• Interest Payment Lifetime Mortgage allows you to repay your interest to take the equity out of your property. So by repaying your interests monthly, you can reduce the loan accumulation and the equity of the provider on the net worth of your property as the plan ends.
• Interest Payment Flexible Lifetime Mortgage is a flexible plan for those who are willing to repay their interests but are unsure of being able to continue it for a long term. So, in case if you stop paying your interest midway the rest of the equity release will again be swapped with the lifetime mortgage with the compound interest being added to the remaining capital amount.

Home Reversion

Home Reversion plan isn’t anymore a people’s favorite but still there is a very less percentage of population still practicing it. According to this plan, you can sell a portion or your property to a home reversion provider in lieu of which you get a tax-free lump sum or regular instalments. Like Lifetime Mortgage, even in Home Reversion plan offers you a rent-free lifetime lease. In case you wish to encircle a portion or secure some of the value of your property to pass on as a heritage to your family, you can easily do that. In this plan, the portion you retain undergoes no change despite any change in property value or structure, until you decide to go for further cash release by handing over the portion you retain. Once the plan comes to an end and your property is sold, the share proceedings happen based on the worth of the remaining portion you own if at all you haven’t sold the 100% to the provider. In Home Reversion plan you get an amount that is the 20% to 60% of the market price of your property or the portion you don’t own anymore. Before considering a home reversion plan, it is necessary for you to review a few important aspects of this plan.

• If the release of the equity a one-time affair or can be withdrawn in instalments.
• If you are eligible for the plan as a few providers prefer customers with age between 60 to 65 years.
• If your age also determines the percentage you will receive as per the market price, the older you are the share increases. Although different providers react differently to it.
• If you are eligible for a lifetime stay in your property till you are shifted to long term care considering the fact that the property remains your main residence and you accept all the clauses mentioned in the contract.
• If you can shift to a different property, with your lender’s acceptance and without hampering your equity release loan.
• If this plan offers ‘no negative equity guarantee’. As per this clause, neither you nor your estate is responsible to pay any remaining loan, if the amount drawn from selling your property doesn’t suffice the outstanding amount after making all the payments to the property agent and solicitor.
• If there is a particular standard of maintenance you have to uphold and what will be the frequency of the property inspection.

A few more things you should know about equity release

If you want to have a good amount of money that is tax-free and are sure of not shifting your main residence then equity release is a fair option. But before making your choice, you should consider a few important aspects of equity release.

• It is a costly plan when compared to other mortgage plans because the rate of interest will be quite high which will result in an increasing debt amount with the compound interest being added to the capital. Moreover, the growth in the value of the property is also obvious. When you opt for an equity release, the providers consider several factors to secure the amount they pay to you, as equity release offers no negative equity guarantee and a fixed rate of interest for the lifetime, which may result in a higher rate of interest.
• In case of the Lifetime Mortgage the repayment day is not a definite one. Moreover, the interest rate doesn’t change till the plan ends until you go for a further loan, and even if you do so the rate of interest will be valid only for the extra loan amount.
• If you opt for home reversion plan, the amount you get against your property is nothing when compared to the market value when the plan ends.
• Once if you opt or equity release then you hardly have any right on your property to take care of your post requirement needs like your long term care payment.
• During equity release you can shift along with your lifetime mortgage but in case you consider downsizing, the equity may fall short and you might end up paying a portion of your mortgage.
• State benefits in UK have a lot to offer to its people specially the retired ones but depending on your equity release your state benefit may be affected.
• Nothing comes for free, not even the equity release as the arrangement fee for the same is somewhere between £1500- £3000, considering the plan you have opted for.
• The equity release plan is anyway a very expensive plan and with the compound interest added to the capital, there is a very less chance of leaving behind any inheritance for your family.
• There’s no going back, which means even if you decide to back off from the plan, there is hardly any option out.
• In case you opt to back off you will have to make early repayment charges and this will be a costly affair, although it’s only till you are medically sound and alive.

Advice for Equity Release

Do not opt for an equity release plan without consulting a financial advisor with a specialist qualification, so that they are able to guide you if truly this is the correct choice for you and also suggest the best suitable plan in the market that meets your requirement.

Before proceeding, ensure with your advisor

• What are their charges?
• What is the best equity release option they recommend to you?
• What are the hidden payable costs like legal, evaluation, set up cost?

Ensure your advisor

• Conducts a proper market research to recommend you the best suitable plan.
• Is from a firm that is listed on the Financial Conduct Authority register, you should also register with Financial Ombudsman Service, to record a complaint for free in case you are not satisfied with the advice or services provided.
• Is an active member of and on Equity Release Council member directory, for an assurance that everything happens according to the rules and standards of the trade body that are a notch above the basic regulatory requirements.

Equity Release doesn’t come cheap, therefore, for a complete understanding of benefits and effects of the equity release plan, consider all the pros and cons of the plan and then go ahead with the advice of a registered financial advisor.

For any sort of queries related to equity release, you can write down to us at enquiry@dnsaccountants.co.uk or book a free consultation with one of our experts.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.