How Does Equity Release Work?13th Sep 2022
What Is Equity Release?
Equity release lets homeowners aged 55 and over release tax-free cash from the value of their home. It’s like a mortgage…but in reverse.
With a mortgage, you borrow money in order to buy a home. But with equity release, you borrow money based on the value of the home that you already own.
This can be a way to free up money if you happen to be ‘house rich but cash poor’. You can use the money you borrow for virtually anything – from helping to fund your retirement to paying off your debts, improving your home or travelling the world.
But it’s not suitable for everyone. So it’s very important to take expert legal advice from a solicitor who specialises in equity release.
How Do I Release Equity From My Home? How Does The Process Work?
There are two types of equity release scheme:
- Home reversion plan – where you sell all or part of your home to a provider in return for a lump sum or regular payments. You can continue to live in your home for as long as you like. When the plan ends, the provider owns your property and can sell it to repay the money owed, plus interest and any fees.
- Lifetime mortgage – this is the most common type of equity release scheme. You take out a loan secured against your home. You can borrow up to 60 per cent of the value of your property. Again, you continue to live there until you die or go into a care home.
Both these schemes are regulated by the Financial Conduct Authority (FCA). Coles Miller is also a member of the Equity Release Council (ERC), which safeguards and promotes high standards of conduct in the sector.
How Lifetime Mortgages Work
As previously stated, you can borrow up to 60% of the value of your home. But this value may be affected by any existing mortgage or loans secured on your property. So the equity that you’re borrowing against will be the value of your home minus those existing liabilities.
You don’t have to make any repayments until you die or move into long-term care. However, the interest is added to the loan, so it can grow quickly. And if house prices do not rise, the debt could eventually exceed the value of your property.
Before taking out a lifetime mortgage, you must understand how the interest is charged – how quickly it is likely to compound up – and how this will affect the final amount that you owe.
This full understanding will help you to evaluate the risks involved, including the possibility that your family may have to sell your home to repay the loan when you die or go into long-term care.
Could I Lose My Home Under A Lifetime Mortgage?
Lifetime mortgages have a ‘no negative equity’ guarantee – but only if you’ve taken out an equity release agreement approved by the ERC. So even if your house does fall into negative equity, you won’t lose your home or owe more than the value of your property.
Very Important: this protection guarantee applies only to lifetime mortgages – not other equity release products.
Never forget that you’re taking out a loan – sooner or later it has to be repaid. And that loan is based on the value of your home. This debt would reduce the value of your estate. So you would have less to bequeath to your loved ones when you die.
Furthermore, the equity release lender may be working to a lower value of your home than you would’ve received had you sold it on the open market. This can limit the value of the loan that you receive.
It should also be noted that taking out an equity release plan could affect your entitlement to means-tested benefits.
Home Reversion Plans
These are rare now because most equity release borrowers tend to go for lifetime mortgages. You can lose your property under a home reversion plan: the ‘no negative equity’ guarantee doesn’t apply to them.
And you need to live at least five or six years after taking out a home reversion plan loan – otherwise it can have a disproportionately negative impact on the value of your estate.
What Else Do I Need To Think About?
As with so many other later-life legal matters, it pays to take a wider, holistic approach when considering equity release.
At some point you may need to leave the property against which you’ve borrowed money and go into a retirement or nursing home. The rules regarding care home funding are complex.
Local authorities are unlikely to grant you any funding if they believe that you’ve deliberately impoverished yourself in order to meet the qualifying threshold. Find out more here about care home funding.
Taking out an equity release loan represents a significant change in your circumstances. On this basis, you should review your will. If you don’t have a will, you should draft one – a will is an important legal document. Everyone should have a will because death is unavoidable.
Have you also stopped to consider what may happen regarding your equity release loan repayments if you lose the power to take important decisions as you become older? Creating powers of attorney enables nominated individuals such as loved ones and/or trusted professional advisers to take decisions on your behalf. Find out more here.
- How Can A STEP Wills And Probate Solicitor Help Me? Read more…
- Do All Wills Need To Go Through Probate? Read more…
- Will My Partner Automatically Inherit My Estate When I Die? Read more…
- Will You Do What’s Right For Your Family? Read More…
- How To Avoid Having To Pay Too Much In Care Home Fees. Read more…
- How Do I Stop Abuse Or Misuse Of A Power Of Attorney? Read more…
- How To Reduce Your Inheritance Tax Bill With A Marriage Or Civil Partnership. Read more…
Get Expert Legal Advice On Equity Release
Contact Coles Miller Partner Anthony Weber, Head of Wills & Probate at the firm. Anthony is an equity release solicitor based in Fleetsbridge, Poole. He is a member of the Equity Release Council.