What is equity release? And how does it work?

Equity release enables you to access the accumulated value tied up in your home. You will still be the owner of the property and won’t have to make any monthly repayments. As the homeowner, you can either draw the money out as a lump sum or as regular smaller amounts.

You, and your partner if you have one, can stay living in your home until the last remaining partner passes on or goes into long-term care. The property must be your main residence and you have to abide by the conditions of the contract.

Equity release schemes can provide a valuable source of later life income. The income can support you to pursue retirement dreams, make up a pension shortfall, manage unexpected expenses or support loved ones financially.

If you have an outstanding mortgage, you may still be eligible for an equity release scheme. However, you will need to use some of the proceeds from the scheme to pay the mortgage off in full.


What types of equity release schemes are there?

The two main types of equity release are lifetime mortgages and home reversion schemes.

Lifetime Mortgage

A lifetime mortgage is the most common form of equity release. It enables you to borrow a proportion of the value of your home. To qualify for a lifetime mortgage, you and your partner must be aged 55 or over.

You can choose to make repayments on the interest if you wish, or allow the interest to roll-up. If the interest is rolled-up, it means that at the end of the first year, the amount of interest charged will be added to the amount borrowed.  The following year, the interest will be ‘compounded’. This means that it will be calculated on the sum of your original loan, as well as interest charged during the first year. This process is repeated each year. To reduce the amount of compound interest, it’s advisable to only take out a lifetime mortgage for the amount you need. There are some schemes that allow you to drawn down additional funds if and when required.

At the end or the plan, or when you pass on, the loan (and any accrued interest) is repaid by the sale of your property.


Home Reversion

Home reversion enables you to sell part or all of your home to a reversion provider. You and your partner must be aged 60 or over to qualify.

The percentage of the property you retain will remain the same whether your home increases in value or not, unless you take out further equity releases. The lease means that you can stay there rent free, without any interference. At the end of the plan, or when you pass on, the property is sold and the proceeds of it distributed according to the remaining proportions of ownership.


Is equity release a safe option?

Equity Release products are much safer than they used to be. Our advisers highly recommend that you only use products approved by the Equity Release Council. Lenders that are members of the council must adhere to a strict code of conduct. This includes providing protection by ensuring their products have a ‘no negative equity guarantee’. This means that when your property is sold and the cost of the outstanding loan, estate agency fees and solicitor fees are deducted, that neither you or your estate will be liable to pay any more. You are also safeguarded by the ‘security of tenure’ standard, which gives you the right to stay living in your home for life. Lenders must also allow you to move to another property during the period of the plan if you wish, as long as it meets their acceptable standards.

It is important to consider all your options, as an equity release scheme will reduce the value of your estate. Alternative options may include downsizing your home, moving to a cheaper area, drawing on other investments or renting out a room in your home.


How much can I borrow?

The amount you can borrow will depend largely on the surveyor’s valuation of your property. Lenders may be inclined to offer more if you (and your partner) are older or you have a significant medical condition.


Seeking financial advice

The Equity Release Council insists that before anyone that takes out plan they have equity release explained to them by an adviser. A qualified adviser can recommend the most suitable plans for your financial situation and explain the tax implications, obligations of both parties (you & the lender), what will happen if you move and how changes in property value may affect your plan.

To arrange a free initial consultation to discuss your retirement plans, call ADN Financial Solutions on 02392 822616.


Equity Release will reduce the value of your estate and can affect your eligibility for means tested benefits.

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