As retirement approaches, many homeowners begin to consider how they can boost their retirement income, pay for care, or support family members with milestones.
Equity release is one option that allows eligible people aged 55 or over to unlock some of the equity tied up in their property, without having to sell it.
This guide from Senior Consultant equity Release Solicitor Gemma Brennan explains what equity release is, how it works, and the key considerations and risks you need to know about if you’re considering it.
What is Equity Release?
Equity Release gives you the opportunity to release funds from your property whilst continuing to live there. It is a handy tool for homeowners over the age of 55 who are looking to top up their retirement income or cover ever-growing care costs. However, it can be difficult to navigate the different options. So, it’s essential to get tailored advice and guidance throughout the process.
What are the different types of Equity Release Plans?
There are two main types of Equity Release Plan:
Lifetime Mortgage Plans
With this plan, you agree to take out a loan based on the value of your home. The loan is secured on your home, but there are usually no monthly repayments to make. Any interest due on the loan rolls up each year, unless you opt to make a payment each month or year. If you choose this option, the details of this will be contained in the Lifetime Mortgage Offer from the lender.
The loan is repaid when your home is finally sold (usually when you move into long term residential care or after your death). Loans provided by members of the Equity Release Council are provided with a fixed rate of interest, so an illustration will be provided to show the value of the mortgage debt in the future.
More recently, equity release plans are available with the option to repay interest or a proportion of the total loan each year. Your financial adviser should explain the options available to you.
Home Reversion Plans
With this plan, you agree to sell a certain percentage of your home to a reversion company for a fixed amount. There is no loan to repay, however when the property is sold, the reversion company receives the same percentage of the sale proceeds as it put in.
For example, if the reversion company purchases 50% of your property it will be entitled to 50% of the sale proceeds, even when the value of your home has increased.
You retain the right to live in your home for the rest of your life, usually under a registered legal lease for life.
What do I need to consider about Equity Release products?
Equity release is a complex and life changing decision, so it is vital that your plan is suited to your needs.
Your financial adviser should explain your chosen scheme, in addition to discussing the interest rates and how the debt grows, the disadvantages and limitations of equity release, and how this can change future options.
Product explanation
You will be aware that house prices can go up as well as down, and the cost associated with setting up your equity release plan will have an impact on the amount of equity you retain in your property at any time.
Equity release schemes let you drawdown cash from your property and remain in your home. You can take the amount as a lump sum or take some now, with the option to make additional drawdowns later. However, interest rates can vary substantially, and the debt will grow and may double in just 10 years.
Exit Penalties
Equity release schemes are designed to end when you die or permanently leave your property, for example when entering permanent care. If you choose to repay the loan early, you will usually have to pay an early repayment charge. This is detailed in the Mortgage Offer you’ll receive from the Lender.
Alternatives
Equity release can be expensive, therefore it is essential to consider other options, such as downsizing or borrowing money from family members. Your financial adviser should outline and consider all these options with you.
What you can expect with Setfords
Ultimate flexibility: Our lawyers can tailor their schedules to meet your needs.
Nationwide coverage: with hundreds of consultant lawyers across the UK, we’ll connect you with the right expert.
Dedicated specialist legal partner: work directly with your chosen lawyer from start to finish.
Highly experienced: Setfords lawyers have an average of 20 years’ experience, so you can be assured you’re in safe hands.
Capacity-based allocation: our lawyers never take on more work than they can handle, so you get the focus and attention you deserve.
What can delay Equity Release?
To help ensure that your equity release matter proceeds smoothly, there are a few common causes for delay that you should be aware of.
Unregistered title deeds
If you believe your property is not registered at the Land Registry, your solicitor will need to inspect your title deeds. Please discuss this with your solicitor if you find yourself in this position.
Enduring or Lasting Power of Attorney
If you have appointed someone to act as your representative under an Enduring or Lasting Power of Attorney, you must inform your solicitor as soon as possible. If the document is registered at the Court of Protection, we will need to receive the original Court stamped copy before proceeding any further. Please note that an Attorney will only be able to act for you where you do not possess sufficient capacity to act for yourself. In this event, we will need your doctor or consultant to confirm your lack of capacity before proceeding.
Leasehold Property
We will usually need to contact your freeholder or managing agent to confirm that ground rent and any service charges are up to date. Even if you have not been requested to pay these charges, we may still need to provide the original copy of the Lease to the lenders’ solicitors. You will be required to obtain a copy of the lease.
Property Subject to a Trust
In some circumstances, legal ownership of your property may be subject to a trust. Most equity release providers will require details of this Trust and may, in some circumstances, be unable to lend until the Trust has been either revoked or varied by way of a Deed of Variation. It is therefore essential that any information relating to a Trust affecting your ownership of the property is provided to your solicitor at the earliest opportunity.
Un-discharged Mortgages and/or Other Secured Debts or Loans
Often, mortgages paid off many years ago remain un-discharged by the old mortgage provider. This may be a result of their offer to store your deeds for you, or may be for another reason. It is essential that any un-discharged mortgages or secured debts are removed from your title in time for completion of the equity release matter. These may include homeowner loans. Please inform your solicitor if this is the case. In addition, for any existing mortgages which are being repaid, you will require your most recent mortgage statement. We will contact the provider to request an up-to-date redemption statement from them.
Buildings Insurance Schedule
Your solicitor will need to provide information regarding your buildings insurance to your equity release provider. Please ensure that you have a copy of your full policy schedule available for your solicitor’s home visit. Please ensure the policy is in the names of all applicants and contains the full details of the insurer, your address, policy number, the start and expiry date of the policy, together with the amount the buildings are insured for.
Is Equity Release the best option for me?
Ask your financial adviser what options are available to you. Your financial adviser is qualified and regulated to determine whether equity release is suitable for you and what plan best suits your needs. Solicitors are not regulated to do so and therefore cannot assist or advise you on this.
Who can take out an Equity Release plan?
To take out an Equity Release scheme you must be:
- Aged over 55 (if it is a joint application, both people must be over 55)
- Own a home worth £70,000 or more
- Live in England or Wales
How do I receive my money?
You have a choice about how you receive your money. You can either receive it in one lump sum, or in a series of drawdown payments from an agreed cash reserve. Please speak to your financial adviser for advice about which option is best for you.
When do I have to pay back the Equity Release loan?
An Equity Release loan is usually paid back when you die or go into long term care. This is why it’s recommended to discuss with, or inform, your family or other beneficiaries before you go ahead with equity release.
Why should I discuss my intention for Equity Release with my family and beneficiaries?
The existence of your plan will substantially reduce the value of your estate to be left to your intended beneficiaries. In some circumstances, there will be little or no proceeds available after any sums owing to the lender are paid.
Where families are not aware of your decision, there is a greater potential for future disputes, and your family may suggest that the terms of the plan were unfair to you, or you did not understand the risks associated with taking out the plan. The best way of ensuring that does not happen is by informing your family of your wishes and your reasons for doing so.
As your solicitors, we are happy to discuss the matter with other parties you authorise us to speak to. However, our ultimate responsibility is to advise you on the nature, effects, and implications of your decision to enter into the equity release contract. We need to discuss this matter with you personally in some detail, be satisfied that you understand the risks and rewards of the plan you have chosen, and that you are proceeding without any undue influence or external pressure.
Can I make a gift of money to my family, friends, or third parties from the drawdown?
Yes, gifting funds to family and friends is a decision that is entirely yours to make.
Where you intend to make a gift of your money to another person or organisation, we would always recommend discussing this with all your family and beneficiaries, as gifting funds may be subject to tax either now or in the future. Where family gifts are made, lack of discussion or misunderstanding are a common cause of future family grievances.
Where you have already bequeathed certain gifts to beneficiaries in your will, we recommend making any necessary amendments to the will as soon as possible.
Can I repay the Equity Release loan early?
Yes, you can, although certain equity release plans will carry a clause that means repaying the loan early may result in you incurring early repayment charges, which can be expensive.
Can I borrow more at a later date?
This will depend on the amount of your existing mortgage, the value of the property, your age, and other factors.
If you decide to apply for any further drawdowns, please note that unless you have a guaranteed reserve facility, the lender may revalue your home and as a result any further drawdown may not be available.
The additional facility may be decreased or cancelled in the following circumstances:
- If you are in breach of a term of the mortgage
- If the benchmark interest rate rises to a level specified by your lender
- If the total amount outstanding (including the original loan plus interest) is more than the value of your home
- If the lender is no longer in business in the equity release market, becomes insolvent, or are no longer authorised by the Financial Conduct Authority to provide lifetime mortgages (equity release)
For this reason, if you anticipate that you will need additional funds in the future, you should discuss this with your Financial Adviser prior to agreeing on a plan.
What happens if my health deteriorates?
Many of our clients undertake an equity release plan as a means of extending the time they can live in their own home. Where physical or mental incapacity begins to impact on a person’s ability to manage their own affairs, it can be extremely beneficial for a family member, or close friend, to be appointed to act for you under a registered Lasting Power of Attorney (LPA).
An LPA could enable your Attorney to make further withdrawals from your existing plan, or even take out a further plan, to support you to continue to live in your home. Setfords can advise you further on the benefits of an LPA, and produce and register the document for you. Please get in touch for tailored advice.
Does an equity release plan stop me from moving house?
No, an equity release plan does not stop you from moving home. However, it can add complications to the move, as there are certain conditions and criteria your new property must meet in order to transfer the loan.
For example, if your new property is of a lesser value, you may have to repay some of the loan.
What happens if I go into care – can my partner still live in the house?
A remaining partner can continue to live in the property, provided you have taken out a joint plan.
What happens if the property value has reduced?
The value of your home can increase or decrease over the years of the mortgage, and what you consider to be the value of your home (or what you are informed is the value) may not be the same at the date of redemption of the mortgage.
However, provided the equity release plan you take out is offered by a member of The Equity Release Council (ERC), it will have a no negative equity guarantee. This means that even if the value of your property falls below the amount owed (capital and interest), you (or your beneficiaries) will never be responsible for making up the balance.
How much will does equity release cost?
An equity release plan offers you the opportunity to continue owning your property and to remain living in it until you are no longer able to, for example, moving into a permanent care facility or upon death.
By deciding to withdraw equity from your home, you are committing to a long-term contract for financial services which, over time, will result in a reduction in the amount of equity you own in your home.
Please ensure you have reviewed and fully understood the relevant section of your lender’s equity release offer, which will provide an illustration of the projected cost of borrowing over the term.
Will Equity Release affect my pension credit?
Yes, any means-tested benefits, including pension credit, council tax benefit, and certain health benefits, are affected by equity release. You will need to check what the financial limits are for your particular situation.
Could I lose my house with Equity Release?
No, homeowners have security of tenure if they choose to pursue equity release. This means that, unless you breach any of the terms of your mortgage, you cannot be evicted from your home.
Is Equity Release safe?
There are some potential risks and drawbacks to Equity Release which must be understood.
First and foremost, the interest on such an option is high and compounded, and if there are other avenues to consider, it would be advisable to do so. That being said, equity release is very well-regulated by the Financial Conduct Authority, and there are reliable protections for clients in place.
Furthermore, homeowners are not required to make any payments during their lifetime, as the mortgage is to be paid back upon first death (in the case of a single applicant) or second death (where there are two applicants), or upon the last owner going into long-term care or sheltered accommodation.
What are the criteria for Equity Release?
In order to be eligible for Equity Release, you must be over the age of 55, own your own home worth £70,000 or more (though some lenders stipulate a minimum of £75,000), and live in England or Wales. A maximum of two owners is allowed upon each application, and both names of said owners must be listed on the Proprietorship Register at HM Land Registry.
If there is only one name listed, the second applicant must be added to the register. Equally if there are two owners listed, but the application is in the name of only one owner (such as in the case of divorce proceedings), one name must be removed.
Is Equity Release an option with shared ownership?
Equity release is only available if you own 100% of the property. This means that anybody who does not own all of their property (with or without a mortgage, which will need to be paid off with the proceeds of the Equity Release) will not qualify.
However, it may be possible for two individuals who own a percentage of the same property to obtain Equity Release together, provided they fulfil the criteria for applying.
It is also worth mentioning that a maximum of two owners can make an application for a lifetime mortgage. A property split equally between three or more individuals would not be eligible for Equity Release.
Can I benefit from Equity Release on a jointly owned property?
Yes, as long as you meet the eligibility requirements mentioned above, and there is a maximum of two owners on the property.
Can I release equity to pay off debt?
Yes, you can use equity release to pay off debt, and it is a viable option for homeowners struggling to keep up with other repayments. However, financial advisers will make a final assessment dependent on the type of debt, and the high interest rates that you can incur should be considered.
Can I benefit from Equity Release on a leasehold property?
Yes, if you own a leasehold property, it is still possible to benefit from equity release. However, the process can be more complicated than with a freehold property. As a result, legal fees are likely to be higher.
Can I use Equity Release to buy another house?
Yes, it is possible to release equity in your current home to buy a second home. Lenders will have criteria that you must comply with, and you will need to pay the associated costs of buying a property, such as solicitor’s fees.
Can I sell my house if I have Equity Release?
Yes, it is still possible to sell your house if you have equity release on your property. However, you will need to redeem the mortgage associated with the equity release, which will likely incur an early repayment charge.
Alternatively, you may be able to transfer the mortgage to another property. However, this may be subject to further criteria set by the lender.
Do you pay tax on Equity Release?
No, you are not required to pay tax on equity release. However, you should consider its effect on means-tested benefits, as stated above.
Can I release equity from my house under 55?
No, in order to be eligible for equity release, you must be at least 55 years of age.
How long does it take to release equity?
The time it takes to release equity varies and depends on several factors, including property ownership, legal considerations, and the case’s complexity. For example, removing or adding a partner from the property register, an unregistered property, going through a divorce, having a property subject to a trust, or acting under a Lasting Power of Attorney can all affect the process.
Other factors, such as associated sales or purchases or the involvement of new build properties, can also increase the time needed. The process may take several weeks, so it is important to be prepared for any delays that might take place. Straightforward cases typically take between 4 to 12 weeks.
Can I release equity if I have a mortgage?
Yes, it is possible to release equity if you have a mortgage. However, it is important to note that the existing mortgage charge must be paid off using the funds that you will be releasing. Any remaining balance (if any) after deducting fees and disbursements will then be paid to you.
How much equity can I take out?
The amount of equity you can take out depends on the value of your property, which will be confirmed by an independent surveyor appointed by the lender. However, an independent financial adviser should be able to provide you with guidance on this matter.
What Impact does Equity Release have on your estate?
This depends on whether you have dependents or family you wish to leave your property to. If you have dependents or family, then it will reduce the estate for the purpose of inheritance. But, you should consider your personal lifestyle. If you do not have any dependents or family, equity release is more likely to be a good option.
Conclusion
In summary, Equity Release can provide a viable solution for homeowners seeking to supplement their retirement income or cover increasing care costs. However, given the complexity of this option, seeking advice from a specialist solicitor is highly recommended. By taking this step, you can make an informed decision, and ensure that your financial interests, and those of your family, are protected.
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