What is equity release and how does it work?
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Equity release is a way you can access the money tied up in your home without having to move. You continue to own 100% of your property value and the loan is only repaid once you die or move into long term care. Its essentially a long term loan for homeowners aged 55 or older.
The money you release is tax free and can be used however you wish. Perhaps for home or garden improvements, to pay off existing debts or mortgages, for holidays, to help family financially or to improve retirement funds by supplementing your pension pot.
Here's how equity release works
When you release equity from your home, a loan is secured against your property that is only repaid once you have died or moved into long term care and your property is sold.
Depending on the type of equity release you choose, the money can be released in a single sum, or in smaller amounts as and when you need it.
Types of equity release – what are your options?
There are two main types of equity release – a lifetime mortgage and a home reversion plan. Both allow you to release money tied up in your home but in very different ways.
Here’s how the two equity release options work:
Equity release option one – a lifetime mortgage
A lifetime mortgage is the most popular of the two options. A loan is secured against your home in a similar way to a typical residential mortgage. The difference is that you don’t have to make any monthly repayments.
Instead the interest builds up over the years and is only repaid when the last surviving plan holder dies or moves into long term care.
Equity release option two – a home reversion plan
This type of equity release is different as a home reversion scheme is not a loan. With this option you agree to sell all or part of your home in return for a lump sum of money.
There’s no interest to pay however, as the value of the property increases, you only benefit from the increase on the percentage of the home that you own.
Home reversion companies take on the risk of unknown future property prices, so they are likely to offer you less than the actual property value.
When the property is sold upon the last survivor’s death (if joint) or because they’ve moved into a care home, the home reversion company will receive their share of the proceeds.
Equity Release Property - Am I eligible?
Equity release eligibility is determined by the providers lending criteria. This will be based on your personal information and the providers equity release property criteria as to what they deem acceptable. Generally the following conditions apply:
- For a lifetime equity release mortgage you or the youngest homeowner must be 55 years of age or over
- For a home reversion plan, you or the youngest homeowner must be 65 years of age or over
- Some lenders impose an upper age limit of 90 while others have no upper age limit
- Your property must be in the UK or Northern Ireland and your main residence
- Your property must be worth at least £70,000 and in good condition
If you have an existing mortgage you can still release equity from your home. However, that mortgage would need to be fully paid off with the money that is released.
Equity release on jointly owned property
You are eligible for equity release on jointly owned properties but the way in which the property is co-owned will determine how the plan works.
Joint tenants – if the property is owned as joint tenants, each person owns the whole property. If one person dies, the property along with the lifetime mortgage automatically passes on to the surviving tenant.
So, with joint tenant equity release, the surviving owner retains full flexibility of the loan and drawdown facilities where applicable and the loan is only repaid once they have died or moved into long-term care.
Tenants in common – if a property is owned as tenants in common, each owner has a share of the property and can state who should inherit their share when they die.
So, tenants in common equity release is available, however the provider may restrict further access and future lending once the first home owner dies.
Equity release examples by age and property value
To help explain more about how much you can borrow with a lifetime mortgage, here are some examples of equity release by age and property value:
Examples of lifetime equity release mortgage maximum borrowing by age and the value of your home
|These figures are a guide, as at 20/9/22; use the online calculator to obtain a personalised illustration.
What else can affect your eligibility for equity release?
In addition to age and value, the type of property, especially non standard property may also affect your eligibility for equity release.
Most standard construction properties ie. brick, stone, tiled or slate roofed houses, flats and bungalows) are acceptable. Some lenders will also consider equity release on non standard property with features such as annexes and flat roofs, however these would be dealt with on a case-by-case basis, with some construction types presenting more challenges.
An advantage of equity release is that your income and expenditure do not affect your eligibility, simply because there are no monthly repayments to be made. Lenders are also more relaxed if you have a poor credit history, although this might depend on how bad the situation is.
Can you be refused equity release?
You can be turned down for equity release, but it all depends on your property and personal circumstances. Although your credit score will not impact your eligibility as such, you may be refused equity release if you have any outstanding IVA’s or County Court Judgements (CCJ’s).
However, the main reasons for being refused equity release are usually connected with the state of your property.
The equity release property lending criteria is based on the value of the property rising over time, so lenders look closely at issues that could affect its value and subsequently the ability to sell it.
Criteria vary between lenders, but the most common reasons given for refusing equity release are:
- Non standard property construction
- Risk of flooding
- Ex local authority
- Proximity to commercial property or electricity
- Flat roofs and single skin structures
- Poor condition and upkeep
- The presence of asbestos