Equity release explained

A lifetime mortgage is a type of equity release. You borrow a set amount of money and use your property as security. Unlike a standard mortgage, there is no need to make monthly payments towards the loan as you can choose to let the interest roll up over time. This means the interest is added to your original loan and to any interest already accrued and this means your debt will increase over time. Some lifetime mortgages will now allow you to make monthly payments and pay back some or all of the interest. Other plans permit penalty free partial repayments usually up to 10% annually.

When you die or go into long term care the loan needs to be repaid including the interest. This is usually done through the sale of the property. Find out more about interest-only lifetime mortgages.

The most common form of equity release is a lifetime mortgage. This can usually be accessed from age 55 onwards and can be a way of supplementing your retirement income using the value tied up in your home. Your equity release or lifetime mortgage lender will decide how much you can borrow depending on your age and the property’s value. Some lenders can even take into account your medical history and may be able to lend you higher amounts than are available through standard lifetime mortgages.

The maximum amount they can lend to you is dependent on the plan you choose. In addition, the amount available will also depend on the age of the borrower with the highest LTVs available to older borrowers. Interest rates on lifetime mortgages are usually higher than a standard mortgage. The rate must be fixed or if it is a variable rate there must be a cap or upper limit for the life of the loan. If you want the option to make monthly repayments to your lifetime mortgage your lender will need to check these are affordable for you. Making monthly repayments will reduce the interest costs incurred on your lifetime mortgage.

You must own a property in the UK to be eligible for equity release. There are also minimum requirements for your age, the value of the property and how much you want to borrow. You will not need to complete an affordability assessment for a lifetime mortgage and equity release lenders will consider those with a poor credit history.

Equity release providers offering lifetime mortgages usually require a minimum age of 55. If you are below the age of 55 and already retired then you could consider a retirement interest only mortgage instead. If you are a couple looking for equity release and only one of you is over the minimum age, you could still get an equity release product, but the younger partner would need to be removed from the deeds.

The broad rule for your property to be considered for equity release is that it is in the UK. However, like standard mortgages, there are more lenders available for properties located on the mainland versus those lending in Northern Ireland and the Channel Islands and the Isle of Man are often excluded.

Your property must be worth at least £70,000 and be in good condition to qualify for equity release although some providers require a higher minimum property value. If it does not meet the standards required, you may be declined for an equity release loan. If your property needs essential repairs then you may need to fix these. When you take a lifetime mortgage you will be responsible for the maintenance, upkeep and insurance of your property.

Equity release lenders will consider a poor credit history, but your acceptance will be dependent on the terms and conditions of the lender and the nature of your credit history issues. If you are bankrupt you may not be accepted for equity release, however there are some lenders who will accept county court judgements (CCJs) and an adverse credit history.

How you choose to spend your cash is up to you. Equity release is often used to

• supplement a pension
• buy a new car
• make home improvements or to refit a home
• fund holidays
• gift family members - helping grandchildren get onto the property ladder is a common example

Drawdown or lump sum?

You should check if your equity release product allows drawdowns or if it is a lump sum plan. To drawdown funds means you access your cash in stages rather than all in one go. The advantage of this is that for a lifetime mortgage you only drawdown the cash you need reducing your interest cost compared to drawing down a larger sum in one go. Some equity release providers may set a minimum amount for each drawdown.

Equity release providers are regulated by the Financial Conduct Authority and increasingly many are members of the Equity Release Council. This trade body has a set of regulations designed to make sure consumers are protected when using equity release products from their members.

Some of the safeguards for consumers include the no negative equity guarantee and security of tenure. This means that when borrowers use a lender that is a member of the Equity Release Council they will never owe more than the value of their property when it is sold following their death or moving into long term care. They can also be assured that they can live in their home for as long as they wish. Furthermore, equity release can only be obtained following financial and legal advice and unlike a traditional mortgage it has no risk of repossession (if T's and C's are met).

Taking out a lifetime mortgage can be a lifeline for those who may not have a decent pension pot, or who aren't willing or able to downsize into a smaller property. As long as you fully understand the process – including the type of lifetime mortgage you're getting, how interest is charged and how it can impact everything from inheritance tax to state benefits – it could prove to be a viable way to boost your bank balance in retirement.

That said, releasing equity from your home isn't a decision to enter into lightly, which is why you'll need plenty of support to determine if it's the right course of action for your particular needs. You should thoroughly discuss it with your children as it'll affect the amount of inheritance you leave behind, but you'll need to seek suitable equity release advice, with this being a vital part of the process.

A lifetime mortgage equity release product charges interest at rates around 4% up to 7%. While this is higher than a conventional mortgage it is the effect of compound interest over many years that really increases the cost of equity release.

For example, if you borrowed £80,000 at 4% you would accrue £3,200 in interest in year one. At the end of year one this interest is added to your loan, now totalling £83,200 and you would accrue interest on this amount. At the end of year two you would have an additional £3,328 in interest to add to your loan. After seven years you would accrue £25,274 in interest and owe £105,274.

There is good news though, you can cut the costs of equity release by choosing a product that allows you to pay back some or all of your interest. And, the no negative equity guarantee available on lifetime mortgages from lenders that are members of the Equity Release Council, means that once you go into long term care or after you have passed away, neither you or your beneficiaries will have to make up any shortfall should your property be worth less than your total debt.

In addition to interest costs you will also have to pay other fees to get an equity release product. These can include:

Just like a mortgage the equity release lender needs to obtain a valuation of your home. This can range from a quick inspection through to a more detailed assessment. The lender will also want to know how other property nearby has sold and the prices they have obtained.

Some lenders may include an arrangement fee for your equity release product. These can range from £500 - £1000. Some lenders offer fee free packages but usually at a higher interest rate.

You need to receive advice from a qualified financial adviser to get equity release. Different brokers charge fees in different ways, this may be a percentage of the loan amount or a fixed fee. 

You will need a solicitor to make sure your equity release is managed correctly and any change in ownership is documented correctly.

Lifetime mortgages are designed as a long-term arrangement with repayment made on the sale of the borrower’s home when they die or move into long term care. If you decide you no longer want the mortgage and decide to pay it back earlier you could incur an early repayment charge. These can be expensive ranging from 3% up to 25% of what you have borrowed. Some lenders will waive the early repayment charge for those who settle their lifetime mortgage due to moving home. There are no early repayment charges if you die or move into long-term care. Some lenders will allow the lifetime mortgage to be repaid when the first borrower dies if the remaining borrower wishes to move home and redeem the lifetime mortgage.

A lifetime mortgage (the most common type of equity release) is more costly than a traditional mortgage. There are three reasons why a lifetime mortgage is more expensive than a conventional mortgage:

1. Lenders do not know when they will get their capital back, unlike a conventional mortgage with a set repayment schedule
2. Lenders are also less likely to receive any cash back for the money lent out as equity release allows borrowers to not make regular or monthly payments at all
3. The no negative equity guarantee – the lender needs to include a buffer to make sure they are not hit by any potential losses from a reduction in property values

Professional financial and legal advice is essential when considering equity release. Receiving advice is a mandatory part of the process but a good adviser will also talk to you about what you are wanting to achieve with the money, the potential alternatives, such as downsizing and any risks and upsides of the alternative products available. In summary your adviser will:

• Consider if equity release is right for you and suggest alternatives if not
• Tell you which type of equity release is most suitable for you, for example draw down, interest servicing or the option to make adhoc interest repayments
• Share with you a personalised illustration showing you the overall cost and fees, what happens if you don’t want equity release anymore, a description of the provider and the product including an interest rate for lifetime mortgages, any additional product features and what you have said you want to release in funds and the type of product you are interested in
• Identify those providers who offer the product features most important to you, such as avoiding early repayment charges if you wish to pay back your loan, no negative equity guarantees to make sure you never owe more than you borrow when the property is sold following your death or going into long term care and how to protect your beneficiaries inheritance
• Help your family to understand how equity release works and any impacts it may have on their inheritance
• Find the best interest rate for your circumstances and credit history

Some financial advisers will use a panel of equity release providers from which they will select the most relevant provider for you and your circumstances. Different advisers may have different providers that they work with. 

Equity release may affect your eligibility for tax credits or benefits, this is because many of these benefits are means-tested. Having a certain amount in your savings or additional income can change what you are entitled to. Your financial adviser should be able to help you understand if this will be a risk.

However, your State Pension typically won't be affected, as this is an entitlement for everyone over State Pension age, depending on your National Insurance record.

Equity release is just one option to help boost your income in retirement. There are plenty of alternatives.

There's nothing to say you have to stop when you reach State Retirement age, and a growing number of people are choosing to stay in the workplace.

Are your savings and investments working as hard as they can? You can also compare savings accounts using our charts.

You could consider downsizing your property to a smaller one which should be cheaper than your current one. This effectively will release some equity, but without any borrowing involved.

If you want the assurance of a regular guaranteed income then you should look to find the best, personalised annuity rate.

Make sure you get all the benefits you're entitled to. You've worked hard all your life, so check that you're getting all the state benefits you're entitled to.