How does equity release work?

Most individuals don’t have the luxury of having tens or hundreds of thousands of pounds sitting in the bank. So, if they are homeowners over the age of 55 who would find a large sum of money very useful, equity release could be a good option.

It could be for home improvements, to help adult offspring with a deposit to get on the housing ladder, to fund a large one-off expense like a wedding, or simply to enjoy a more cash-rich lifestyle.

In this article, our expert team at PIL Southampton explains how equity release works, and what you need to consider before choosing to go down this route.

What is equity release? 

Equity release is a way to get hold of the money that is tied up in the value of your home without having to sell your house, meaning that you can continue to live there. It is available for anyone aged at least 55.

How does equity release work? 

When you take out an equity release product with a mortgage provider, depending on the terms of the product, you will have the option to release equity in one lump sum or in several amounts over time – this is called ‘drawdown.’  

How much equity you will be allowed to release will depend on your age, how much your home is worth and other factors we cover in more depth later in this article.

There are two categories of equity release products:

Lifetime mortgages 

This is the most common option for an equity release product. With a lifetime mortgage, you remain as the homeowner and borrow money against the value of your home by releasing a tax-free percentage of income.

As you can tell by its name, this type of equity release product lasts for the rest of your life, with the interest continuously being rolled up over the whole life of the product and added to the amount that you have borrowed.

Home reversion plans

Home reversion plans are less common. You become a tenant of the mortgage provider, who becomes the owner of your home in return for the cash lump sum – or regular income if you choose – they give you when you sell all or part of your home. When your home is sold, the reversion company receives either all the proceeds of the sale if they have bought the whole house, or a proportionate share of the proceeds if you only sold part of the property to them.

What is equity release used for? 

Of course, you can use a cash injection in your middle and later years for anything you like. Popular reasons are home and garden improvements, financially helping a family member, buying a second home to rent out for retirement income, treating yourself to a new car or going on the holidays you’ve always dreamed of.

What are the costs of equity release? 

When you are considering whether equity release is a suitable option for you, make sure that you take into account the range of fees involved: the surveyor’s valuation, solicitor’s costs, completion costs, paying for advice, the lender’s application costs, cumulative interest and any early repayment fees. 

How much can I borrow with equity release? 

There is no fixed amount that you can borrow with equity release; the amount you are able to release would be dependent on several factors that the lender would take into account, including a professional valuer’s estimated valuation of your property, your age and your health. 

Note: If you are making a joint application, the younger applicant’s age will apply. 

The lender will also look at the type of property you are applying to borrow against, i.e. whether it is a listed building or built from non-standard materials. 

They will also look at how much of an outstanding mortgage you have on the property.

Important considerations for equity release

There are various key factors you need to consider when you are deciding whether to take out this type of product:

• You get to choose to take one lump sum, or a reduced lump sum plus further, smaller amounts over time.
  
  
• You will continue to own your home until the mortgage has to be paid upon the death of the last surviving borrower, or when they go into long-term care.
  
  
• If the lender’s terms allow, you would be able to move to another property without paying early repayment charges.
  
  
• You can make a certain number of overpayments but, if you go above that level or if you want to repay the whole mortgage before you die or go into long-term care, you could be liable for early repayment charges.
  
  
• Although there is no requirement to pay monthly repayments, interest will still be added to the amount you borrow, which will eat away at the amount of inheritance you leave for your loved ones.
  
  
• Taking out a lifetime mortgage may affect any means-tested benefits that you are currently entitled to and, if you do claim benefits, you must notify the Department for Work and Pensions or the council if you receive money from equity release.

No negative equity guarantee 

To meet the standards set out by the Equity Release Council, all equity release products must have a ‘No Negative Equity Guarantee.’ This means that your estate will never owe more than the value of your property when it is sold, and any remaining money at the end of your plan will go to you (if you are in long-term care) or to your beneficiaries if you have died, in accordance with the instructions in your will. 

If there is a negative equity situation when your house is sold, the no negative equity guarantee means that the shortfall in the loan repayment would be written off by the lender.

How PIL Southampton can help you 

Our expert team of mortgage advisers are the ideal people to talk to about your options. It is their job to keep up to date with all the product options available across the marketplace. This knowledge, combined with their years of expertise and their conscientious care to get to know and your individual circumstances, will help them to find you the most suitable solution that should best suit your needs.

How you can contact PIL Southampton

You can email us, fill out the contact form on our website or call us on 02380 668407. We look forward to hearing from you.