How does Equity Release work in the UK?
In simple terms, Equity Release is a product that allows you to release Equity from your home for any legal purpose. The money you borrow is usually repaid when you or your partner dies.
There are often no repayments required (although with some lenders you are able to make payments towards it). The interest is simply added to the balance of the loan.
What are the Equity Release Interest Rates?
These will depend on your own individual circumstances, Lenders take into consideration:
- The amount of Equity Remaining in your property
- How much Equity you would like to protect
- Your Health
- Your Age (You must be aged 55 or over)
As well as these there are other considerations. Such as if you would like to make payments and if so how much and how often. You will then get a rate that is personal to you and your circumstances. The cheapest rate may not be the best option for you.
How many types of Equity Release are there?
Broadly speaking there are 3 different types of products. Which one is best for you really does depend on your own circumstances
1) Retirement Mortgages
These are Standard Mortgages that are designed to run well into your Retirement years. These are designed for those who want to make contractual payments to the Mortgage company to ensure that the interest doesn’t get added to the loan. This mean’s when you die your beneficiaries (those who you would like to leave your house to) receive the Equity you intended for them. These Mortgages are still subject to the Lenders affordability calculations and usually end around the age of 85. You could then look to Remortgage to another Equity Release Product
2) Equity Release (sometimes called Lifetime Mortgages)
Equity Release Mortgages allow the monthly interest to be added to the loan each month so that you do not need to make the repayments. You need to be over the age of 55 in order to apply, own your own home and not currently be Bankrupt (other credit issues such as CCJ’s, Defaults and Missed Payments may not be an issue). You can raise the money for any legal purpose.
3) Home Reversion Plans
This is the only option where you will no longer own 100% of your property. Home Reversion allows you to sell some or all of your property for a fixed sum (usually lower than what it is worth) in exchange for the cash. You also get a guarantee that you can live in the property for the rest of your life. The Money Geeks do not offer advice on these types of plans as they are quite rare. However we also believe in being totally open with our clients by telling you they exist. If you want more information on Home Reversion Plans we maybe able to suggest companies you can talk to.
What are the features of an Equity Release Mortgage and what do they mean?
Equity Release Mortgages (Option 2 above) have different features than the normal Mortgages you maybe used to. Its useful to remember at this point that each lender sometimes has different terms and conditions for these features so they may not all work exactly the same.
Equity Release Drawdown
When you first decide you want to release Equity from your home you may not need access to all of the money straight away, but you would like the option of releasing further cash in future without having to go back through the application process. That’s where an Equity Release Drawdown facility can help. Think of it like having a large overdraft that is secured on your home. If you don’t use the overdraft then you don’t pay for it but its handy to know its there when you need it. Although unlike an overdraft with a Drawdown facility once you take the money out then its not so straight forward to pay it back in (See our explanation of Early Repayment Charges). Different lenders have different rules about this, some will setup a drawdown facility automatically while others you will need to apply for it, its also worth knowing that the money available in your drawdown facility can be withdrawn by the lender at anytime.
Making Voluntary Payments
Its worth remembering that you do not have to make payments towards your Equity Release Mortgage. Although doing so means that you can control the Interest being added to your loan and therefore protect your Equity. These payments are voluntary and how they work can vary quite significantly from lender to lender. Some lenders will allow you to setup a regular monthly payment while others will only allow you to pay off lump sums (usually between £500 and £5000), some even restrict the number of times you can make a lump sum payment each year. It’s a great way of controlling how much interest is added to your account, but make sure you check the terms and conditions offered by each lender before committing. Naturally the Equity Release Advisers here at The Money Geeks will do this for you.
Some clients are concerned that with interest being added to the loan there will be no Equity remaining in the property. This may not be what they want for their beneficiaries (usually their Children, Grandchildren etc). The Equity Guarantee means that if you choose to protect a portion of the cash in your property, lets say 10% for example. No matter how much interest is added to your mortgage there will always be 10% of the property value available to pass on to your beneficiaries. The amount you can protect is up to you and it may mean that you cannot borrow as much as you would like.
Why getting the right Equity Release Advice is so important
Surely Equity Release is quite simple, just pick the cheapest rate – Right?
Not in our opinion. Equity Release can be quite a complex product that can have unintended consequences if you get it wrong. You could potentially lose access to any means tested benefit’s or incur high Early Repayment Charges. Some Early Repayment Charges can but up to 25% of the amount borrowed. Our Regulator (The FCA) enforce a rule that means all advisers must hold a Specialist Qualification on Equity Release. The Money Geeks not only have these Qualification but also has years of experience in this field. Getting the right advice really could save you thousands of pounds in the long term.