Equity release

Equity release is a process that allows you to monetise some of your home’s value. This option is primarily offered to UK homeowners aged 55 or over as an additional source of retirement income.

For homeowners, equity release presents an opportunity to tap into the monetary value locked away in their property. With an equity release plan, a cash lump sum can become available for various purposes, from mortgage clearance to home renovations. However, while the prospect may sound appealing, certain restrictions have been established to safeguard both lenders and applicants.

A significant limitation of equity release is the age requirement. For eligibility, you must have celebrated at least 55 birthdays. Nevertheless, lenders typically provide alternative solutions for those falling below the age threshold, offering other avenues for raising necessary funds.

WHAT IS IS AND HOW IT WORKS

Equity release is a process that allows you to monetise some of your home’s value. This option is primarily offered to UK homeowners aged 55 or over as an additional source of retirement income. Most equity release schemes revolve around lifetime mortgages, with a minimum age limit of 55.

Other home reversion plans require a minimum age of 60, making equity release schemes the youngest minimum age offering. The equity you can release from your home depends on your age and property value. Moreover, any existing mortgage must be cleared before claiming equity release.

There are several types of equity release, including:

LIFETIME MORTGAGE: RETAINING OWNERSHIP WHILE RELEASING EQUITY

A lifetime mortgage involves securing a mortgage on your property (provided it is your main residence), while retaining full ownership. You have the option to make repayments or allow the interest to accumulate. The loan is fully repaid by selling the property upon the death of the last borrower or their transition into long-term care.

HOME REVERSION: SELLING FOR A LUMP SUM OR REGULAR PAYMENTS

Home reversion involves selling a portion or all of your home to a provider in exchange for a lump sum or regular payments. This arrangement allows you to continue living in the property until your passing, but requires you to maintain and insure it. The percentage you retain remains constant, regardless of fluctuations in the property market (unless you opt for further cash releases). Upon the last borrower’s death or move to long-term care, the property is sold and sale proceeds are divided according to ownership proportions.

ENHANCED LIFETIME MORTGAGE: TAILORED TO YOUR HEALTH AND LIFESTYLE

An enhanced lifetime mortgage, also known as an ‘impaired’ lifetime mortgage, is an equity release scheme where the lending criteria are based on your personal health. A health and lifestyle questionnaire determines the amount of money you can release.

EQUITY RELEASE MORTGAGE: TRADING EQUITY FOR CASH

An equity release mortgage involves a lender providing you with money in exchange for a share of the proceeds when your property is sold at a later date. Unlike a traditional mortgage repaid over an agreed period, your equity release mortgage isn’t settled until after you vacate your home. Since equity release gives you access to some of the cash tied up in your home, you receive a tax-free lump sum which can fund various needs, from home improvements to mortgage buyouts.

UNLOCKING FINANCIAL POTENTIAL UNDER AGE 55

If you are under age 55, alternative routes exist, including remortgaging, secured loans and equity transfer.

REMORTGAGING

Homeowners can remortgage their property, allowing them to borrow a larger sum whilst maintaining regular monthly mortgage repayments. Unlike equity release, remortgaging is accessible regardless of your age. It is generally advisable to consider remortgaging to avoid early repayment charges as you approach the end of your existing mortgage term.

SECURED LOANS

Next, we focus on secured loans, alternatively known as homeowner loans. This route involves releasing value from assets, which serve as collateral for the lender. Although these loans are traditionally secured against your home, they can also be underpinned by other valuable assets, such as a vehicle. However, the chosen asset must typically hold a minimum value of £10,000. Secured loans come with an obligation for mandatory monthly payments. Failure to meet these requirements could result in the lender seizing the asset.

EQUITY TRANSFER

Another avenue is available for homeowners under 55 who share joint ownership with someone older – sole equity release applications. Here, you can gift your share of the property to the co-owner, thus enabling them to apply solely for equity release. However, tread carefully. This route involves potential Stamp Duty Land Tax payments if the transferred amount exceeds the threshold. Legal fees may also apply to complete the process.

This also has a considerable risk, particularly if you are not married to the co-owner. In the event of a relationship breakdown, you stand to lose your share of the home and any accrued equity. Furthermore, should the sole applicant move into long-term care or pass away, the remaining owner must repay the equity release lender or face eviction.

Under certain circumstances, the survivor may be able to use equity release to raise funds, depending on their age, the timing of the homeowner’s death, the equity release balance and property value performance.

As with any equity release plan, legal advice is essential. The transferring party must seek independent legal advice to understand the transfer’s full legal and financial implications. This process may involve signing an occupancy waiver relinquishing any claim to the property.

Don’t forget, our professional friendly advisors are on hand to support you and can help you explore all of your options.

We are proud members of the Equity Release Council.