Equity Release and lifetime mortgage

As retirement approaches, we often start to think about how we'll manage financially, especially if we have a small pension and limited savings. If you own your home, are over 55 and have little or no mortgage, you might be considering equity release. If so, this section of our website will provide you with some basic information on how it works and whether it's right for you.

What is equity release?

Equity release is a way that older homeowners can release cash from their home without having to move. You borrow money against the value of your home, but pay nothing back until your home is sold – either after your death or when you go into long-term care. Alternatively, you can raise money by selling your home, or part of it, but continue to live in it until you die or go into long-term care. But first, there are quite a few things to consider. Equity release is a big decision and might not be the best or the only solution. If you receive state benefits, what will the impact be? If your
circumstances change, will it affect your ability to move? If you have children, how will they feel about it? You may want to discuss it with them first.

Start by thinking about other ways to raise money – perhaps by moving to a smaller property, claiming any state benefits you may be entitled to.

Who can choose equity release?

You usually need to:

• be at least 55 years old (the older you are, the more money you are likely to raise from the scheme)
• have paid off your mortgage (or have very little left to pay off)
  
• own a property in the UK in reasonable condition and over a certain value.

There are quite a few things to consider. Equity release is a big decision and might not be the best or the only solution.

Lifetime mortgage

• You take out a loan secured on your home.
• You keep full ownership of your home, although you will have to pay back the loan on it, together with the accumulated interest.
• The loan is repaid from the sale of your home, either when you die or move into long-term care. Reputable schemes guarantee that the repayment will never exceed the value of your property.
• Some providers offer a 'drawdown' facility, which means that instead of borrowing all you need as a lump sum at the start, you can take smaller cash amounts either on a regular basis or as you need to.

This is a lifetime mortgage. To understand the features and risks, ask for a personalised illustration.

Home reversion

• You sell your home, or part of it, to a reversion company.
• You no longer own your home, or you only own a part of it. You receive a lease giving you the right to live there rent-free (or sometimes paying a token rent) for your lifetime, or until you have to move into a care home. Get a solicitor to check the terms of the lease to make sure you know what to expect.
• The reversion company will get its payout when the property is sold.
• The reversion company will only pay you a percentage of the current market value of your property because it may have to wait years for its return.

This is a home reversion plan. To understand the features and risks, ask for a personalised illustration.

What are the pros and cons of lifetime mortgages?

Pros

They can provide a guaranteed monthly income or a large lump sum.
You get to keep and stay in your own home.

The loan is only repaid on death or the sale of your property.

There's the potential to benefit from any future increases in the value of your property.

Fixed rates prevent interest spiraling out of control.

Many schemes guarantee the total debt cannot exceed the value of your property.

When the house is eventually sold and the debt paid off, there may be money left over to provide some kind of inheritance.

The equity released on your main property is tax free.

Equity-release schemes can help to reduce your Inheritance Tax liability.

Cons

The inheritance you pass on to your beneficiaries will be substantially reduced and won't include your home itself.

They can be inflexible if your circumstances change – you'll usually need the provider's permission for someone else, such as a relative, carer or new partner, to move in.

They might affect your entitlement to benefits, as any money you raise through equity release is likely to affect the assessment of your income and capital.
You might need to pay arrangement, valuation and legal fees.

If you sell up or die soon after taking out a plan, your estate could incur a loss.
You might not be able to transfer all of the debt if you move to a smaller property.

You will be required to have buildings insurance.

Lenders will expect you to keep your home in good condition, so you will need to set aside some money for repairs and maintenance.

Remember, you'll still be responsible for paying your utility bills and Council Tax, so you'll need to make sure you can afford these.

Key safeguards

The Financial Conduct Authority (FCA), the UK's financial services regulator, regulates lifetime mortgages. This means that firms advising on or selling these products have to meet certain standards and provide clear complaints and compensation procedures.