Equity release in the current climate, By Marie Dalrymple, Ascot Lloyd Mortgage & Protection Consultant
The Coronavirus crisis has sparked an interest in the equity release market as clients reconsider the impact on their financial plans and alternatives to creating cashflow into retirement and the years ahead. People who have found themselves with employment uncertainty or the threat of businesses collapsing they are looking to create some way of releasing available finances to offer some foreseeable stability.
Equity release enables homeowners aged 55+ to draw a lump sum or regular sums from the value of their home, while remaining in their homes and without having to make monthly repayments.
The market for equity release has grown considerably in recent years with £3.94 billion released from bricks and mortar over the course of 2018, according to the Equity Release Council. This has been fuelled by product innovation and flexibilities such as options to repay early when downsizing to a smaller property, ring-fencing a guaranteed minimum inheritance, and making interest or capital repayments to minimise the cost or reduce the loan size over time.
Frequently asked questions
What types of equity release are there?
There are three ways to release equity from your home: downsizing, a Home Reversion Plan, or taking out a Lifetime Mortgage:
- Downsizing involves moving to a cheaper property, though this potentially means moving away from your home and community.
- Home Reversion Plan sells part of your home so you can still live there, but you won’t be the full owner.
- A Lifetime Mortgage means you remain the full owner of your home for life so you do not need to sell or move. There is no need to make monthly payments with a Lifetime Mortgage unless you choose to, and there is the option to guarantee an inheritance and place some funds in a reserve account to withdraw when needed.
Why would you want to release equity?
There are many reasons why people take out an equity release plan:
- To take out an interest-only mortgage to pay off an expensive repayment mortgage
- For home improvement
- As a gift to children which could help to save on inheritance tax
- To help children get on the property ladder
- To consolidate debt into a single manageable pot
- To supplement your income if your pension isn’t quite enough to live on
- To avoid moving out of a property to raise money
- To pay for care fees or care at home to look after an ill relative
How do I know if I am eligible for an equity release plan?
To be eligible for equity release you will need to be aged 55 or over, and have a home in the UK worth at least £70,000.
What is the maximum equity I can take out?
How much you can borrow depends on the value of your home and the age of the youngest applicant. Maximum Loan to Values (LTV) will vary from one lender to the next and is generally between 20% and 50% of your property’s value. The older you are, the more you can borrow.
What if I don’t need all of the money right now?
If you don’t need all the money you release, you can opt for a ‘drawdown’ option. This means you only release the money you need from your home when you need it. For example, you could release £100,000 but only drawdown £20,000. The benefit is you’d have the £80,000 available to take out without having to go through the application process, and interest is only charged on the amount you release.
Can I move or sell my home if I’ve taken out equity release?
Yes, you can take the mortgage with you to your next home although this could be subject to lender criteria.
Could I ever lose my home?
A common worry with equity release is the fear of repossession, but this will never happen with any plan approved by the Equity Release Council, thanks to built-in safeguards that protect you from ever owing more than you can repay.
What happens to my property when I die?
The property is usually sold once the last remaining borrower has died. The family will have 12 months to make the sale or pay off the loan themselves and keep the house.
What happens to inheritance tax if I’ve taken out equity release?
Would you like more help? Our team of experienced independent financial advisers can guide you through the full range of mortgage and equity release options available to you and advise on the making the right decisions for you, taking into consideration your wider financial plan.
Get in touch to talk to us about your needs or arrange a free initial consultation with one of our advisers.
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