Equity release is an increasingly popular way for homeowners to access some of the equity tied up in their house. For mortgage-free homeowners, their house can often be their biggest asset, but one which produces no cash flow. Equity release can allow tax-free access to the equity. What differentiates equity release from a traditional mortgage is the fact that there are no payments to make until the house is vacated, either on death, or when the homeowner moves into residential care.
The total amount of equity released by over-55s in the UK was a record £4.8bn in 2021[1].
Equity release schemes can be popular for several main reasons:
- Large increases in house prices in recent decades have left many older people with large amounts of home equity, but few options to access it without either downsizing or having the ongoing cashflow demands of a mortgage
- Equity release removes the stress, costs and emotional upset of selling your home in order to access the equity
- Equity release lifetime mortgages can be taken out flexibly via drawdown, meaning the money is only released when it is required. This avoids the need to pay interest charges unnecessarily and is useful if the money is used to pay ongoing costs, such as medical expenses.
Classifications of equity release
Equity release comes in two flavours – the lifetime mortgage and home reversion. Lifetime mortgages, the more common option, are secured loans on your house, similar to a traditional mortgage, but with no ongoing monthly repayments required. As the name suggests, they are intended to run for the lifetime of the homeowner. However, all reputable products will allow the borrower to make penalty-free repayments, on a regular or ad-hoc basis, to control the balance of the loan. Many lifetime mortgages also provide an Inheritance Protection Guarantee, meaning that some of your home equity is ring-fenced from the loan, to be passed on in your estate.
With a home reversion product, the lender purchases a percentage (up to 100%) of the equity in your home, at a below-market price, and in return gives you a cash lump sum and the right to reside in the house rent-free for the rest of your life. This means that the remainder of the equity is protected for your beneficiaries.
While equity release was at one time a less regulated product and some borrowers received a poor deal, in recent decades the industry has introduced substantial safeguards to protect consumer interests. The Equity Release Council (ERC) promotes professional standards among equity release advisors and accredits advisors who conform to them. These standards protect borrowers’ interests in several ways[2]:
- For lifetime mortgages, the product must have a ‘no negative equity’ guarantee, where the total loan amount plus all interest will not exceed the value of the property
- For lifetime mortgages, the interest rate must be either fixed for each release, or if variable, capped for the term of the loan
- The borrower must have both the ability to live in their property for life (or until they move into care) and the right to move house without having to repay the loan (subject to the new property being acceptable to the lender)
- The borrower must receive information on all costs involved in setting up the plan, the tax implications, and the procedure if they wish to move house after setting up the plan
An equity release adviser will be able to help you find an appropriate equity release product for your needs, such as one that offers your inheritors a grace period to pay back the lender without having to sell your house.
[1] Equity release market transacts £4.8bn, shows ERC report (mortgagefinancegazette.com)
[2] Standards | Equity Release Council (accessed 25.11.22)
