What is equity release and how does it work?

Did you know that as part of our service we now offer equity release advice? Releasing equity from your home can help you turn your property into valuable retirement income.

Today we speak to Louise from our Financial Planning team about Equity Release, what it is, how it works and how it could potentially work for you…

Louise, thank you for chatting to us today.

For the people out there that don’t know, can you explain what equity release is?

Hi, absolutely – Equity release is a way of letting you release some of the equity, or value, held in your property.

So, for example, if your property is worth £100,000, you may have the option of releasing £20,000 from it.

Okay, so equity release is a way of getting at some of the cash you have stored in the value of your property?

Yes, that’s it in a nutshell.

Right, I understand – so what qualifying criteria would I have to meet if I wanted to release equity from my home?

I’m glad you asked. There’s a couple of key criteria. Age and property value. The youngest applicant must be at least 55 years old and you must have enough equity in your home to meet the lenders’ criteria.

An equity release mortgage is quite different to a traditional mortgage, which would look at income, expenditure, how many children you’ve got and lots of other criteria.

An equity release lifetime mortgage is purely based on your age and the value of your property, and also there’s no end date to it.

OK, so as long as I have enough equity built up in my home and I’m over 55 I would likely qualify?

Yes, generally that’s the case.

So, if I was considering releasing equity from my property for say, a kitchen renovation or to help out my family, how does equity release work?

Ok, there’s two types of equity release. One’s a lifetime mortgage and the other’s a home reversion plan.

Home reversion plans are much less popular than lifetime mortgages, with lifetime mortgages accounting for around 99% of all equity release applications. Home reversion plans probably do less than half a percent of applications.

Home reversion plans have a lot to do with how equity release got a bad name.

With home reversions plans you probably only get 40p in the pound.

A lifetime mortgage is, in essence, an interest only mortgage on your property that’s got no end date. So if you live to 120. It can go on until you’re 120.

These days, most equity release schemes are what you’d call a hybrid scheme. So what that means is you can take lump sums flexibly at different times or one upfront payment.

If you take it all on day one, you can either pay the compound interest payments. This means that your debt will never go any bigger than what it is.

What you can also do with an equity release is you don’t have to take the full lump upfront.

So, say, for instance, somebody was 55, and again their property was worth £100,000.

● They’ve taken £50,000 out of the property.

● They want 25,000 to do something now

● But, you know, they didn’t quite have as much of a financial buffer for the future. So they can put the remaining £25,000 into drawdown to access when they want.

What that would mean is they’d only actually start paying compound interest on the first £25,000.

With the second £25,000 they wouldn’t pay any fees until they actually accessed it.

Why has equity release become so popular again in recent years?

I think a lot of it’s to do with people living longer.

Gone are the days of having a defined benefit pension scheme where you would get a guaranteed retirement income for the rest of your life.

So because of that, a lot of people are saying, you know, ‘my house is my castle’. It’s what I put my money into all my life. So I’ll take some of the equity out of that.

This still gives them the option to retain ownership and live there for the rest of their life.

Some people use it for holidays. Some help their children get on the property ladder.

Another reason people use it as well sometimes for Inheritance Tax planning. So it’s putting the debt on the property to reduce the inheritance tax bill.

There are so many reasons people use it , and sometimes it’s just purely because they need more income in retirement because  they’re living longer. If we think back, you know, people only used to live until their early seventies.

At Joslin Rhodes, we plan till 90 just as a starting point, factoring in everything from holidays to care fees.

Okay, but is equity release safe?

Yes, it is safe.

There’s now something called the Equity Release Council.

The Equity Release Council really covers consumers, a bit like the protection we have with the Financial Conduct Authority (FCA).

Also with every equity release scheme available now, the house can never, ever, be in negative equity.

Say for instance, your house is worth £100,000. Compound interest for 17 years will have doubled the interest on your loan.

Now, you may potentially owe more than your home is worth.

That would be the lender’s problem.

You’ll never have to pay any more.

It’s called a ‘No-Negative Equity Guarantee’ – brought in by the Equity Release Council to protect consumers.

So how do the equity release lenders get their money back?

With equity release when somebody passes away or enters long term care, the other partner is allowed to live in the property.

So if one or two people live in the property, it’s always on second death or second person going into long term care.

What would happen is there would be a charge that’s put on the property.

But not until the second death or when the executors are dealing with the estate and the house is sold and with their funds be retained.

Now, hypothetically speaking, if it was a year after somebody had passed, and the house hadn’t been sold. As long as the executors were in touch with the provider, Aviva or whoever it was, to tell them what was going on, they’re absolutely fine with that.

You’re running an equity release workshop on the 26th of July, how could this benefit our clients?

It would be very much a benefit.

I think a lot of people have a very negative view of equity release.

Many still think of the old equity release plans, which were akin to home reversion plans. This was almost like somebody coming along and stealing the house off you because of the low amount they’d offer in relation to the actual property value.

Whereas equity release now has totally turned on its head.

It’s really a great opportunity for clients to find out the options available and how equity release could work with their financial planning to fund their retirement.