How Does Equity Release Work?

7 min read
    How Does Equity Release Work? From Parachute Law

What is equity release?

Releasing equity from a home allows individuals aged 55 or over to free up the cash tied into their property, without having to make any monthly repayments. They are most often used by parents who want to gift money to their children to buy a home of their own, or by people who want to release funds to enjoy their retirement.

You will receive less than the full value of the equity you release, so you must receive independent legal advice before making the transaction. Read on to find out more about how equity release works

What's the difference between a lifetime mortgage and equity release?

A lifetime mortgage is one way to release equity, the other alternative is 'Home reversion'. The main difference in how equity release works, is that with a lifetime mortgage, you borrow, whereas with home reversion, you sell. In both cases you can take the money in one lump sum, or in several payments, or a combination. You retain the right to live in the property until you die, or move into long term care.

How does equity release work?

Lifetime Mortgage
Home Reversion
Is there a minimum age?
Usually 55, depending on your Lender
May be up to 65, depending on your Provider
How much equity can I take out?
Usually, you can borrow up to 60% of the value of your property.
(Dependent on your age and the value of your property).
Usually, 20% to 60% of the market value of your home (or the part you sell).
(This percentage increases dependent on your age, but varies from lender to lender).
Can I sell my house if I have taken equity release?
Yes. But, your Lender must accept the new property as continuing security for your loan.
Do I get all the money at once, or in payments?
This will depend on your Lender/Provider. If you can get the money in payments, means you only pay the interest on the amount you’ve withdrawn so far.
This will depend on your Lender/Provider.
What property can I use?
The Property must be your main residence.
What are my rights to the property?
You retain ownership of The Property until you die or move into care.
(The property must continue to be your main residence and you must abide by the terms and conditions of your contract).
You retain the right to live in the Property rent free until you die, but you are still responsible for maintaining and insuring The Property.
Where does the money come from?
You take out a Mortgage, secured on The Property
You sell part or all of your home to the lender for below market value
Can I protect any of the ownership for my estate?
Depending on the mortgage provider, you choose whether to ring-fence some of the value of the property for your family to inherit. (This will reduce the amount you can borrow against the property).
You can choose to ring-fence a portion of the property for your family to inherit (this percentage remains the same regardless of any change in The Property's value, unless you decide to take further loans against your equity)
Do I have to make any payments?
No. You can choose a lender who allows you to make repayments on the mortgage, or to allow the interest to 'roll-up', increasing the total amount owed every month.
No, but you are still responsible for the maintaining and insuring The Property
When is the money paid back?
When you die or move into long term care, the loan amount, plus any accrued interest is paid back to the lender from your estate.
When you die or move into long term care, The Property is sold. the sale proceeds are shared according to the remaining proportions of ownership
How much interest do you pay on equity release?
Interest rates must be fixed or, if they are variable, there must be a “cap” (upper limit) which is fixed for the life of the loan ( ERC standard).

Different Lenders and mortgage agreements will allow you to pay pay none, some or all of the interest. However this may be means tested.
You do not borrow money in a home reversion plan, so, you do not pay interest.

Can you lose your house with equity release?

You can continue to live in your home until you die, or move into long term care.

In a lifetime mortgage, the accrued interest could raise the total amount owed up to the full value of the property, except for any amount that you ringfence in the original mortgage agreement.

If you have not ring-fenced any equity the compound interest could increase the amount owed to the entire value of the house, leaving nothing to your estate. However, you still retain the right to live in The Property for the rest of your lifetime.

In a Home Reversion Plan, you choose the percentage of the property that you sell to the provider.

ERC standard: No Negative Equity Guarantee - This means that in either option, when your property is sold, and agents’ and solicitors’ fees have been paid, even if the amount left is not enough to repay the outstanding loan to your provider, neither you nor your estate will be liable to pay any more.

What is the catch with equity release?

Here are a list of some of the pitfalls to look out for in your terms.:

  • You will receive less than market value. This reflects the fact that you can continue to live in the property rent free until your death.
  • You might end up owing far more than you borrowed. Even if you only release the equity in a percentage of your property, the compound interest on a lifetime mortgage could increase the amount owed until it matches the full value of the property. (No equity left to your estate)
  • Equity trapped in your home will not be factored into means testing, but once it has been released a liquid funds it will effect means testing for any benefits you may be entitled to, including help with the cost of care.
  • There will be less equity in your home for you to rely on later, for costs such as end of life care.
  • Even if you can move house, you may not have enough equity to do so, meaning you may have to repay some of your mortgage.
  • Arrangement fees range from £1,500 to £3,000.
  • It can be very hard to change your mind and you may incur early repayment charges if you do.

How does remortgaging work to release equity?

If you are young enough to take out a regular mortgage you could remortgage your house, this means borrowing more money against the equity in your home that you have already paid off.

You will be means tested to show that you can pay back the total owed before you are likely to retire.

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