If you’re over a certain age and you’re looking to release some money for later in life, equity release could be an option.
But what exactly is equity release? And does everyone qualify? The term ‘equity release’ is shrouded in mystery, but understanding a bit more about what it is and how it works can help you demystify the topic and perhaps even access some of the money tied up in your home.
What is equity release?
If you’ve heard of equity release but don’t quite know what it means, don’t worry. We’re here to help. Put simply, if you live in a mortgaged property, the equity is the difference between the amount you still owe on a mortgage and the value of the property. Essentially, it’s how much of the home you own.
With that in mind, equity release is an agreement that lets you release some of the money in your primary residence without having to move. It’s essentially a type of mortgage, but the amount you borrow (plus interest) is repaid by the sale of your home when you die or move into long-term care.
The minimum initial loan amount for most equity release plans is around £10,000 and the maximum amount is usually around £1,000,000. To find out how much you could release, use a free equity release calculator.
There is also no single interest rate for equity release but most lenders offer fixed interest for the duration of the mortgage.
The two main types of equity release are a home reversion plan and a lifetime mortgage. We’ve explained these in more detail below:
Home reversion plan
A home reversion plan is a type of equity release that allows you to sell anywhere between 20% and 60% of your home in return for a cash lump sum, a regular income, or a combination of both. In most cases, they’re only available if you’re 60 or older.
Once the house is sold (when you die or move into long-term care), the company that administered the home reversion plan will profit from the share that you sold to them. For example, if you sold 50% in exchange for £75,000, the company would be entitled to 50% of the proceeds from the sale.
It’s worth noting that because your home won’t be sold for the market rate, you’ll be selling a portion of your home for less than its market value. This could mean that your estate is significantly reduced if you were to die not long after taking out the plan and you could end up inheriting less if you planned to leave some money for your loved ones.
Lifetime mortgage
A lifetime mortgage is the most popular type of equity release in the UK. The minimum age is typically 55, but there is no upper limit.
It works by taking out a loan secured on your property while continuing to live there. The money is then repaid by your estate when you die or move into long-term care.
If you and your partner take out a lifetime mortgage, the mortgage still won’t be repaid until both parties have died or moved into long-term care, so you are both free to live in your home for the rest of your lives. It might be possible to pay back a lifetime mortgage before this, but you will likely incur early repayment charges.
How much debt do you have?
What is the Equity Release Council?
The Equity Release Council (ERC) is a non-profit trade body for all things related to equity release. It exists to educate people about equity release and promote high standards among equity release providers.
It stands for honesty and fair treatment and champions healthy competition among competitors in the equity release market, allowing for greater choice, flexibility, and protection for homeowners considering equity release.
The ERC works closely with the UK government and the Financial Conduct Authority (FCA) to set standards for both equity release providers and plans. Before choosing an equity release plan, it’s worth checking if they’re a member of the ERC.
What are the key equity release eligibility criteria?
It can be useful to do your research to know if your property meets the eligibility release criteria. The eligibility criteria for home reversion plans and lifetime mortgages differs between providers, but most stick to the same general rules.
For example, for a home reversion plan from most equity release providers, you must be 60 or over, mortgage-free, and have a property with a minimum value (typically £70,000).
For a provider to offer equity release through a lifetime mortgage, on the other hand, you must be 55 or over, own your home in full with little to no mortgage to pay, and your property must be worth over a certain amount (usually £70,000 or £75,000).
Most standard construction properties qualify for equity release. Some lenders might be less willing to approve your application if you have a timber-framed home or shared ownership property, or you have an annexe, but this is becoming less of a problem as time goes on. Ex-local authority-owned or leasehold properties might also incur extra charges.
Essentially, you’ll typically qualify for most equity release plans if you’re over 60, you own property with no outstanding mortgage, and your property is worth more than £70,000. There is no universal upper property valuation limit, but some lenders impose their own.
to debt advice?
- Skip the queue for help
- You take control
- Expert-matched advice
Fast Track only speeds up access to debt advice—it doesn’t affect approval times or outcomes of any debt solution. Fast Track applies during regular business hours, otherwise advisors can offer personalised advice from 8am the next day. T&Cs apply.
What are the pros and cons of equity release?
Understanding the benefits and risks of equity release can help you make an informed decision. We’ve outlined some of the factors you should consider before choosing to release equity from your property below:
Advantages
- You can choose to receive the money through a tax-free lump sum or regular payments
- You can continue to live in your home until you die or move into long-term care
- You might still be able to move as long as the new property is similar in size and value
Disadvantages
- The value of your estate could be reduced
- You might need to give up a share of the ownership of your home
- Your entitlement to means-tested benefits, pension credit, a council tax reduction, and your tax position could be affected
Remember, equity release affects various areas of your life and isn’t a decision that should be taken lightly. It’s crucial that you carefully consider all your options and seek independent legal advice if necessary before deciding which avenue to go down.
Which factors affect equity release?
The amount of equity you can release depends on several factors, including the youngest applicant’s age, the location of your property, and any existing medical conditions you have (and how serious they are).
However, by far the biggest determining factor is your age. Put simply, the older you are, the more equity you can typically release. The age of the youngest homeowner is the one that will be used, but some equity release lenders require both parties to be over a certain age to qualify.
Next, where you live will be taken into consideration. For example, there are fewer lenders in Scotland and only two lenders in Northern Ireland compared to England and Wales, potentially impacting your ability to get accepted for equity release. It can also be difficult to release equity if you live on an island as some lenders won’t accept properties based outside of the mainland.
Lastly, your medical history plays a key role. Generally, the more health conditions you have, the more equity you could release. This is because your life expectancy could be lower as a direct result of your poor health.
“No fuss, just simple, honest advice. Communication is good and they make the process as easy as they can.”
Can you get an equity release plan with poor credit history?
Unlike a traditional mortgage, your credit history doesn’t play as much of a role in your ability to get accepted for equity release. This is because equity release doesn’t require you to make monthly repayments.
However, if you have an adverse credit history, this could still have an impact on the amount of equity you’re able to release. Nonetheless, you shouldn’t let poor credit deter you from applying for equity release altogether, as you’ll likely still get accepted one way or another.
If you have questions specific to your personal circumstances or want to boost your chances of being approved for equity release, it’s recommended to seek free advice from a financial advisor. It’s always better to prevent a rejected equity release application than deal with it after it happens.
What are alternatives to equity release?
Equity release can be a great way to release some of the money tied up in your property later in life, but it isn’t the only option available to you.
Here are some of the main alternatives you should consider:
Selling your assets
If you have any items of value that you could potentially sell for cash, this might be an option worth exploring.
For most people, their home is the most valuable asset they own. However, that doesn’t mean that it’s the only thing they can sell to raise some extra money. Some of the other things you could consider selling include vintage clothes, old jewellery, or rare vinyls.
Getting a loan from friends or family
It might not be what you want to do, but if a friend or family member would be happy to do so, asking them for a loan can be an alternative to equity release.
Even if it’s just a short-term interest-free loan to cover the cost of a home improvement, this could end up saving you money in the long run. This can also mean you have more inheritance to leave to your beneficiaries when the time comes.
Moving to a cheaper property
Downsizing to a cheaper property can allow you to save money you otherwise would have unlocked through equity release.
However, it’s worth considering any extra costs that would offset any savings made, such as estate agent fees, stamp duty, and moving costs.
Applying for state benefits
Checking your eligibility for state benefits can ensure you’re receiving all the financial help you can. You might discover that you qualify for enough extra money to help top up your income that you don’t need to get equity release.
To check if you’re eligible for state benefits and how much, use a free benefits calculator.
Debt help tailored to you
From writing off a large portion of your debt, to readjusting your budget, we’ll find a solution that suits you.
Conclusion
Equity release can be an effective way of freeing up some of the money tied up in your home later in life. The money can be used for whatever you like, such as a home improvement, inheritance, or repaying an existing mortgage.
Your age, where you live, and your health can determine how much equity you’re able to release from your home.
It’s important to do your research and consider all your alternative options before applying for equity release. If you have any questions, it’s usually completely free to seek professional advice from an equity release adviser or financial adviser.
