Equity Release – Explained
Get in touch today to discuss your needs and goals.
Kevin Spear and Esther Field from Mortgage Marketplace join the Mortgage and Protection Podcast to bust some myths surrounding Equity Release.
What exactly is equity release?
Equity release is a mortgage secured against your property that runs for the rest of your life. Instead of repaying the mortgage, however, you receive payments from the Equity Release lender as a source of income for you. You’re not required to make any repayments, but you can if you wish to.
Is equity release regulated? Is it safe?
Equity release is regulated just like any other mortgage. The Financial Conduct Authority (FCA) oversees lenders, the advice process and individual mortgage brokers.
We’re all registered annually with the FCA – you can check online that a broker you’re dealing with has the correct licence and is authorised to give you the advice you need.
Equity release is also called a lifetime mortgage. Do I have to stay in my property for the rest of my life?
No, not unless you want to. A lot of people do take equity release to stay in their property for life and not have to sell it. But people also want to downsize, especially if their partner passes away. If this were to happen, a lifetime mortgage allows you to repay the loan in full within two years of your partner’s death.
Alternatively you can move and bring the lifetime mortgage with you to a new property.
If you choose to repay the loan, check for early repayment charges, as these can be expensive.
Could I end up owing more than my house is worth, leaving children and family with the debt?
This is a common misconception, and the short answer is no, that’s not true. Equity release lenders must subscribe to the Equity Release Council, which has a regulatory code of conduct which prevents negative equity.
In an extreme example, where interest rates become very high, or there was a property crash at the wrong time, your equity release product would not let you owe more than your home is worth. Negative equity can’t occur because in this situation the lenders are obligated to freeze the interest.
Are there ways to mitigate the increasing balance owed?
When you seek advice around equity release your broker will help you select a lender and a product that are appropriate for your specific situation. Some people choose to pay the interest on the mortgage, if they have the income to do so.
The alternative is to have the interest roll up, which is useful for clients with limited income, that have a lot of equity in their home.
There’s also a voluntary payment system where you can put some money towards interest but not pay it off entirely.
How can I reduce the debt on my Lifetime Mortgage?
In addition to servicing the interest, there are other payment options too. Most lenders will allow you to repay up to 10% of the initial amount borrowed, with certain minimum payments.
If you wanted to pay 10% a year for 10 years, theoretically you can be in a position in year 11 where you’ve collectively paid off the loan. When we’re doing our product recommendations, if this is a key consideration for you, we’ll include it in our advice.
Are equity release rates expensive?
No, the interest rates are very competitive with traditional mortgages, especially when you consider that they are fixed for life – the rate will always stay the same, which offers great peace of mind.
If you take out a plan now at 2.5%, in five years time you will still be on 2.5%, no matter what the housing market is doing.
Do I lose control and ownership of my home?
No, definitely not. A lifetime mortgage is exactly the same as any other kind of mortgage – the house is owned by you. In most instances the mortgage is repaid when someone either enters permanent, long term care or they die.
The property is then given to the family, or other representatives of the estate. If the homeowner has died, their family has 12 months to repay the mortgage by selling the property or raising funds elsewhere.
The homeowner or family never loses the home and you have a good amount of time to repay the loan at the end.
Is it true that I can’t get equity release unless I completely pay off my existing mortgage?
No – in fact you can use equity release to repay the mortgage if you want to. The only condition is that the equity release is the only ‘charge’ against your property on completion. It is actually a very common way of paying off the debt, especially with an interest-only mortgage.
What are the most common uses of equity release?
One of the most common purposes is to repay an existing mortgage, and represents around a third of our clients. A second common application is to support families, usually children or grandchildren, with their mortgages. Typically clients use the mortgage to provide them with a deposit to help them buy a property.
A third area is to get around inheritance tax, for people who have got significant assets in their homes. They raise a debt against their property and give the money to the family to protect it from the taxman.
Finally, equity release can be a way to provide an income to make retirement more comfortable.
What if my circumstances change during the application process?
The details of that change will affect the next steps of the process. If it’s a change that means equity release is still an ideal solution, we will amend our advice or find a new product to fit the new circumstances and continue forward.
If the new circumstance means that equity release is no longer the right product, then we simply won’t recommend it. We are always focused on what’s best for every client.
What’s the process to access equity release?
We provide equity release advice in a very structured environment and there are a couple of steps involved. First is an initial meeting where we explore your objectives and what you want. We will explain exactly how equity release works, how much you stand to gain, what the pros and cons are.
There’s a bit of consumer protection in the process too, involving a solicitor who registers the mortgage and checks that you fully understand all the implications of the product and what’s involved. The process can go as quickly as you wish, but we are very focused on making sure everything is transparent.
We often involve family in those meetings as well, because the outcome can affect your children. Ultimately you are borrowing from their estate, so it’s important that everyone understands what’s involved.
How does this affect my beneficiaries’ inheritance?
We often involve the whole family in a discussion around equity release – either all in one room, online via a video call or on the phone.
It’s important because you don’t want your family to be expecting to inherit a house. Everyone has the right to understand what’s happening so there are no surprises. The reaction we usually get from clients’ children is “it’s your house, it’s your money. We want you to be happy and comfortable, so go ahead.”
Usually there’s a very supportive environment to help mum and dad in their retirement.
Is equity release right for me?
If you’re considering equity release, the best thing to do is talk to a few advisers to find someone that you like and trust, that seems to understand your needs. This is a big, lifetime transaction and you need to understand it completely.
If someone is pushing you, don’t do business with them. Get the mortgage from somebody you’re comfortable with. There are some excellent mortgage brokers out there – but there are also some not-so-good ones.
You should also be encouraged to communicate with your family – they may think of questions that haven’t occurred to you. It is very reassuring to have the support and acceptance of others.
For an initial chat about equity release and whether it might work for you, just get in touch.
Frequently Asked Questions
Call us today on 0800 170 7474 to discuss your borrowing potential and eligiability.
Typically, the mortgage process will take 2-6 weeks to reach approval.
A mortgage offer is usually valid for 6 months.
Please be aware, the process is currently taking longer due to Covid-19. Please see question ‘How has Covid-19 affected the mortgage market?’.
Whilst you are not required to take out a life cover, our job is to ensure your mortgage is affordable, no matter what. It may not be nice to talk about, but if something were to happen to you, you want to know your family and investment are safe.
We will advise on all the options available and provide a no obligation quote from our partner providers.