If you’re looking to release funds from your property without having to move home or take on monthly mortgage payments, then an equity release mortgage could be an option for you.
There are different types of equity release mortgages (lifetime mortgages and home reversion plans), as well a wide range of features and lenders. With this in mind, the Financial Conduct Authority has set it as a requirement that potential borrowers seek advice from a qualified equity release advisor ahead of applying for a mortgage.
What is an Equity Release Mortgage?
An equity release loan is a type of mortgage that allows you to take money from the value built up in your home, without you having to sell, move or take on new monthly payments. There are two types of equity release mortgages:
Lifetime Mortgages: Like a regular residential mortgage; you borrow money against the value of your home. There’s one major difference; you don’t have to make any monthly repayments as the interest is accrued and paid as a lump sum when the house is sold on death (or the last borrower moves into permanent care)
Home Reversion Plans: This is where you actually sell your property (or a part of it), however you continue to live in your home without rental payments until death of the last borrower, or they move into permanent care. There are pros and cons of each option depending on your circumstances and future plans, and it is worth speaking with a qualified mortgage advisor to understand your options.
How do Equity Release mortgages work?
With a lifetime mortgage, you borrow money against the equity in your home (the value of your home minus any other borrowing you have against it) in the same way you do with a traditional mortgage. The major difference is that rather than make a monthly repayment of the loan capital and interest, this is all rolled up and only payable as a lump sum when the property is sold on the death of the last borrower (or if they move into permanent care).
With a home reversion plan, you sell your home (or a portion of it) at a below-market-value price, on the basis that you continue to live in the property without any new rent or mortgage payments. You’re able to stay in your home until the death of the last borrow, or if they move into long-term care.
Both options mean that borrowers can realise the equity built up in their homes without having to worry about monthly payments (in the form of repayments or rent), however it is essential to speak with a qualified financial advisor in order to understand the full implications of these deals, including how it can impact means-tested benefits and any inheritance plans you may be making.
Am I eligible for an Equity Release mortgage?
There are two core criteria to be eligible for an equity release mortgage:
1) You need to own your own home and have sufficient equity available to cover the amount you want to release (equity is the difference between the overall value of your home and any debt, such as mortgages or loans, that you have secured against it)
2) For a lifetime mortgages (the most common type of equity release loan) there is a minimum age requirement of 55 years. With home reversion plans (the less common form of equity release), some lenders set minimum age requirements at 60, and some even insist on a minimum age of 65.
Outside of this, lenders will look at other factors such as the value of your home and any other debt arrangements you might have. Prior to this though, it is essential that you speak with a qualified financial advisor to discuss your circumstances and plans and ensure that equity release is the right route for you.
How safe is equity release?
Equity release products (in the form of lifetime mortgages and home reversion plans) are heavily regulated by the Financial Conduct Authority (the FCA), meaning there are strict regulations in place for financial advisors and lenders to follow. On top of this, leading lenders are members of the Equity Release Council, an industry body aiming to raise standards within the equity release market.
With this in mind, consumers are heavily protected and can consider themselves safe from unscrupulous lending practices.
However, this doesn’t mean that equity release loans are the right solution for every borrower, as there can be negative consequences such as an impact on benefits or inheritance plans if the right advice is not taken. This is why we would strongly recommend seeking regulated financial advice before pursuing an equity release product.
Can I make repayments on an equity release mortgage?
The general idea behind releasing equity through a lifetime mortgage is to draw down money without having to make any repayments (until the last borrower dies or moves into permanent care). However, it’s not uncommon for borrowers to want to make voluntary repayments against the amount they borrowed.
The simple answer is yes; it’s possible to make repayments on your lifetime mortgage. However, the detail behind this is a little more complex as the repayment allowances and early repayment charges vary from lender to lender.
With this in mind, it’s strongly recommended that you speak to an equity release specialist prior to making any repayments.
How much equity can I release from my home?
Whilst individual lenders have different criteria, a good rule of thumb is that you can typically borrow 20% – 60% of your property value with a Lifetime Mortgage. So if your property is worth £300,000, you could expect to borrow between £60,000 and £180,000.
There are several key factors that will determine how much you can borrow, including your age, the property details, and the health of any borrowers (including lifestyle factors such as smoking). If there’s any other debt on the property, such as an existing mortgage, then this will also heavily factor into lending levels as it reduces the amount of equity in the property (the property value minus any borrowing such as mortgages or secured loans)
Several lenders also have minimum and maximum amounts they will lend, regardless of your circumstances.
With all this in mind, it’s essential that you speak with a registered financial adviser before speaking with a specific lender about an equity release mortgage.
At what age can I take out an equity release mortgage?
The age of a borrower is one of the key criteria around eligibility for equity release mortgages. With a Lifetime Mortgage, there is a minimum age of 55. With a Home Reversion Plan, the minimum age for some lenders can be as high as 65.
While it can be uncomfortable to think about; it’s an important point to understand that lenders are only able to see a return on their loan when the last borrower dies or moves into permanent care . With this in mind, the age of borrowers is a key factor when lenders are assessing an equity release application
What are the interest rates for an equity release mortgage?
Similar to residential mortgages; the interest rates for equity release mortgages are tied directly to the Bank of England base rate, and therefore fluctuate regularly. However, it’s important to note that the rates are typically more expensive than average standard mortgage deals.
Over the last 5 years we’ve seen average Lifetime Mortgage rates typically run between 1.5% – 2% higher than average residential mortgage rates. Of course, as this is based on broad averages there are lots of exceptions, and the rate each borrower is offered is dependent on several key factors such as age, borrowing levels and the property details.
How much does an equity release mortgage cost to arrange?
Outside of the actual interest you pay on the loan, there are usually three costs associated with releasing equity in your home via a lifetime mortgage:
Firstly, your Mortgage Advisor will typically charge you for providing financial advice. This involves them reviewing your circumstances and plans, and providing recommendations on the right solution and product. This cost is usually charged as either a fixed fee or as a percentage of the loan you’ve taken out, and will be agreed up front with the Advisor.
Secondly, the lender themselves will typically charge an arrangement fee (sometimes called an application fee) for setting up the loan. These charges vary from lender to lender, with some lenders even offering zero-fee deals. A good financial advisor will take all of these costs into account when recommending the best deal for you.
Finally, as a part of the equity release process you will need to appoint a Solicitor to act on your behalf. This will involve them executing the paperwork on your behalf, as well as ensuring your best interests are protected. It is strongly recommended to find a Solicitor who specialises in equity release mortgages, but costs can vary so it’s worth getting a few quotes before making a final decision.
While there are many factors that will impact the exact fees you will need to pay, it is prudent to budget £1,500 – £3,000 to cover the administrative side of the equity release process.
How long does an equity release mortgage take?
Timescales can vary depending on your lender, the availability to complete a valuation, and any backlog within the legal team. As a broad estimate; the typical equity release process (using a lifetime mortgage) would take around 8 weeks from making an application to receiving your funds.
Whilst there are ways to expedite the process, it is essential that the time is taken to consult qualified financial advice prior to making an application, and it is strongly recommended to work with a reputable provider who is a member of the Equity Release Council.
Do I need a Financial Advisor for an equity release mortgage?
In short; yes! It’s essential that you speak to a qualified financial advisor before undertaking an application for equity release through a lifetime mortgage or a home reversion plan.
An equity release mortgage can be an excellent way of realising the value built up in your home, however the suitability is highly dependent on your personal circumstances and your plans for the future (such as any money you plan to leave as inheritance). By getting qualified financial advice you will be able to discuss your future plans, your current financial situation, and your shorter term needs, and ensure that equity release is the right route for you.
Any advice you receive should be from an individual or firm that is on the FCA (Financial Conduct Authority register, and have prior experience in dealing with equity release. If you believe you have been given unsuitable advice or misinformed in any way, the financial ombudsman will be available to you with a complaints and compensation process.
Can I get in negative equity with an equity release loan?
With a lifetime mortgage it’s theoretically possible to get into negative equity; where the debt you owe is higher than the value of your home. In this scenario, your estate could be left with a debt to pay to the lender after the property is sold.
However, all products from lenders associated with the Equity Release Council come with a ‘no negative equity guarantee’. This means that even if the debt associated with your loan was higher than the value of your property, there would be no debt for your estate to pay.
This guarantee is there to give borrowers the confidence that their lifetime mortgage debt won’t have a negative impact on their loved ones, and is one of the key reasons to make sure you’re dealing with a lender who is a member of the Equity Release Council.
Are equity release mortgages regulated?
Yes, equity release lending is fully regulated by the Financial Conduct Authority (the FCA). This covers both lifetime mortgages and home reversion plans, and means that any advice you are offered must strictly comply with the FCA regulations.
These FCA regulations offer protection to you as a consumer; as you can be confident that an FCA registered Advisor or lender is following strict rules around the advice they provide you. This includes ensuring that reasonable steps are taken to ensure that any products recommended are suitable for you and your circumstances (including affordability, tax position and impact on benefits). If you feel that a firm or advisor is not acting within FCA regulations, there are protections available through the Financial Ombudsman Service (the FOS) and the Financial Services Compensation Scheme (the FSCS).
As well as this formal FCA regulation, consumers are also protected if they choose to work with an Advisor, Solicitor or Lender who is a member of the Equity Release Council. The Equity Release Council is a not-for-profit organisation that aims to raise standards in the equity release market by ensuring that their members follow a set of rules that go above-and-beyond in providing value and protecting consumers. Visit the Equity Release Council website to learn more.
What is the Equity Release Council?
The Equity Release Council is a not-for-profit organisation dedicated to raising standards in the equity release market by promoting fair practices. The core objective of the organization is the protection of consumers, and in doing this they aim to raise confidence, trust and awareness of equity release products.
The membership of the Equity Release Council is made up of specialist equity release professionals, including Solicitors, lenders, Intermediaries, Financial Advisors and Surveyors. Together, they agree to hold up the standards of conduct and the safeguarding practices.
In practice, these standards represent key protections for consumers such as the ‘No Negative Equity Guarantee’. This Equity Release Council standard means that consumers taking out an equity release product through one of their members will never be in a situation where their estate has a negative equity liability (where the final amount owed to the lender is higher than the value of the property).
With this in mind, we recommend working with professionals who are members of the Equity Release Council.
You can learn more about the Equity Release Council, their work, and their members, on their website www.equityreleasecouncil.com.
What are the downsides or risks of equity release?
Equity release loans are heavily regulated financial products, with strong consumer protections in place. However, as with any kind of secured loan; they are not without risks and are not suitable for every borrower or circumstance.
With a standard residential mortgage, the biggest risk is that your home could be repossessed if you do not keep up with repayments. However, because there are no repayments on a lifetime mortgage (as the amount borrowed is repayable on death or the last borrower entering permanent care), the risks are more subtle.
The key risk with an equity release loan is that the product isn’t suitable for your personal objectives, and the short-term requirements for cash aren’t considered against your longer term financial plans. For example, a lifetime mortgage will likely impact your inheritance plans, and can have an impact on means-tested benefits. If these factors weren’t fully considered at the planning stage, then over the lifetime of the loan you could be left with less money for your estate, or fewer funds available in retirement. This is why it’s critical to take qualified financial advice when considering any kind of equity release loan.
There are also horror stories of equity release loans leaving the estate of a borrower in negative equity (where the amount owed to the lender is higher the value of the property when it’s sold), however this is negated through the ‘No Negative Equity Guarantee’ commitment when you borrow from a member of the Equity Release Council.
Read our in-depth guide to the risks of an equity release mortgage to learn more.
What are the best companies for equity release?
There are a large range of lenders who provide equity release products, either as lifetime mortgages or home reversion plans. Each provider has a range of products suitable for different circumstances, and taking independent financial advice will help you understand which provider is most suitable for you.
Whilst it’s too subjective to say which providers are the best for equity release mortgages, one key thing we’d recommend is looking for is a lender who is a member of the Equity Release Council. This gives you the assurance that they follow the high standards of practice set out by the ERC, and gives you protections through consumer friendly features such as the ‘No Negative Equity Guarantee’.
Lenders on the Equity Release Council member list include mainstream providers such Aviva, Nationwide & Scottish Widow, as well as more specialist lenders such as Standard Life, Hodge & Canada Life.
What happens with equity release on death?
With a lifetime mortgage; on the death of the last borrower the loan will be repayable to the lender (both the initial amount borrowed, and the interest accrued through the lifetime of the loan). This will mean that the property will likely need to be vacated and sold, unless the estate intends to use separate funds to clear the loan.
The majority of lenders allow up to 12 months after death for the balance to be repaid, allowing the estate the time to either sell the property or obtain the funds elsewhere. These timescales vary from lender to lender, so it’s always essential to checking before taking out a lifetime mortgage. There are some lenders that allow an extended repayment period, with repayment not required until up to 3 years after the death of the last borrower.
One important thing to note is that interest on the mortgage will continue to accrue until the loan is repaid, even after death. So if the estate did use an extended timescale of 3 years to settle the balance, there would be an additional 3 years of interest to repay on top of the balance at the time of the borrower’s death.
What can I spend Equity Release money on?
When you release funds from your home using a lifetime mortgage or home reversion plan, the money is yours to spend as you wish. The most common uses of equity release funds are to pay off debts (such as mortgages, credit cards and loans), or to provide additional funds to enjoy retirement and later life (either to fund a general increase in living standards, or to fund one-off treats such as holidays)
We also see many borrowers using the equity release cash to help family members by funding things like university fees or helping first-time-buyers get themselves on the property ladder.
Whilst there are no legal restrictions on how your equity release money can be spent, a good financial advisor will want to understand your plans to make sure that the loan product you’re taking is the most suitable route, and that there will be no adverse effects (such as tax liabilities, or impact on any means tested benefit). They will also look to ensure that you’re protected and receiving legitimate advice if the funds are intended to be used for any investment purposes.
Can I move house after I’ve taken out an equity release mortgage?
There’s a misconception that because a lifetime mortgage is secured against your home, you’re unable to sell the property and move. Fortunately for borrowers, this isn’t true, and there are several options available that allow you to move home even after you’ve taken out an equity release mortgage.
The most common solution is to simply ‘port’ your lifetime mortgage, which means to move the same loan with the same lender from your current property to your new home. In this sense, lifetime mortgages behave in the same way as standard residential mortgages. The major difference is that even after moving your loan to the new property, there will still be no monthly repayments and the amount borrowed (plus the accrued interest) will be due to be prepaid on the death of the final borrower.
Whilst porting your mortgage offers a simple solution to this question, it should be noted that there will likely be some fees involved, including paying for a valuation of the new property and paying legal fees.
The second option is to pay off your lifetime mortgage when you sell your current property and take out a new loan when you purchase your new home. This is generally a less favorable option as you’ll often be faced with early repayment charges for exiting your lifetime mortgage early. The one circumstance where this might be beneficial is if current market mortgage rates are lower than your existing rate, and paying early exit fees might be offset by the savings on the accrued interest.
While it’s not a legal requirement to seek financial advice when moving your lifetime mortgage, we would advise that it’s worth speaking with an experienced advisor to understand which of these options is right for you, and the full implications of any decisions you make.
