equity release

An equity release is a loan that lets you get money from your home equity without having to sell your home. In the UK, you must be at least 55 years to take out an equity release. If you are that age, and you decide an equity release is the best move for you financially, you can borrow between 40% and 60% of the current value of your property.

This article will teach you the finer points of how you can get an equity release in the UK. For the mortgage professionals who typically come to our site, this can be an excellent article to send along to any client with questions about equity release.

What is meant by equity release?

In the UK, an equity release is for homeowners who are typically 55 years of age or older who want to release some of the equity they have accrued in their property. While there is no pre-paid term, the loan that you take out against the equity in your home is repaid when you either pass away, move into a long-term facility, or sell the house.

Additionally, there are usually no monthly repayments; instead, the interest is included in and added to the initial capital when you repay the loan.

Equity release: How it works

Unlike a standard mortgage application, equity release applications do not require the typical affordability assessment and credit checks. The reason these are foregone is because your property is used as the security for the loan.

If you own a home outright and it is your main residence in the UK, you can usually take an equity release out. Most of the time, a lifetime mortgage—which is another term for equity release in the UK—can be taken out if you live in the UK for at least six months of the year.

Flexible reverse mortgage

There is also a flexible reverse mortgage option, which allows the borrower to make monthly repayments. Typically, a flexible mortgage is used by homeowners who are still employed, who are relatively young, and who want to release equity while protecting their children’s inheritance.

With a flexible reverse mortgage, the balance of your account will not increase if you repay the interest each month. Instead, when the time comes, you will only need to repay the initial amount borrowed.

Equity release: How old do you have to be in the UK?
In the UK, you usually need to be at least 55 years old to take out a lifetime mortgage/equity release. Some lenders do, however, have a higher minimum age. In fact, there are also lenders that have a maximum age cap at the time of taking out the equity release.

While the most common age cap is 85, there are also lenders whose age cap is as high as 95 years old. There are no upper limits on the end of the loan due to the nature of the type of borrowing.

Equity release: How much you can borrow

The most you can borrow using an equity release depends on various factors, including:

• Age. Usually, the older you are in age, the more money you can borrow through an equity release.
• Life expectancy. Typically, if you have a lower life expectancy, you are usually able to borrow more money.
• Home value. There is no set percentage of equity that can be released by an equity release. However, you can borrow as little as 8% or as much as 70%, depending on your financial circumstances. As part of the application process, your lender will request that an independent valuer assess your property before deciding the percentage of equity that can be released.

Who benefits from an equity release?

Equity releases benefit retirees who do not have a lot of cash savings or investments, but who do have wealth built up in their properties. Equity releases let you turn your asset into cash, which you can then use to pay for expenses that come with retirement.

Equity release: Advantages

There are, however, other benefits. Here is a list of some of the advantages of taking out an equity release in the UK:

• Taxes. The funds that you get from your equity are tax-free.
• Monthly payments. There are no requirements that you must make monthly payments.
• Inheritance. An equity release provides you with inheritance protection, which allows you to protect a part of your property.
• No restrictions. Because there are no restrictions on how you can spend the money you free up from an equity release, you could use the funds to purchase a property.
• Moving. An equity release does not restrict you from moving into another property, if that makes financial sense for you.
• No negative equity. These types of mortgages come with a no negative equity guarantee, meaning that, despite fluctuations in home prices, you will not have to repay more than the value of your property at the time it is sold.

Equity release: Disadvantages

As with any mortgage deal, it is important to weigh the disadvantages of equity releases as well. The biggest downside is that it can become quite costly. If you continue to live for a significant period after taking out the equity release, the interest can accumulate and affect the value of your estate.

Here are some of the disadvantages of getting an equity release in the UK:

• Ineligibility. If you get an equity release, you may be ineligible for benefits you would otherwise be entitled to.
• Interest rates. Compared to more traditional types of mortgages in the UK, interest rates are usually higher for equity releases.
• No protection. If you get an equity release from a lender that is not a member of the UK Equity Release Council, you will not be protected against eviction, repossession, or negative equity.
• Inheritance tax. If, for instance, you give the gift of the equity you borrow to a family member, for a deposit on his or her first property, they may have to pay inheritance tax on it.
• Fees and legal costs. You may have to pay legal costs and other fees to arrange the equity release.

How much money do you get from an equity release?

There are multiple factors that determine how much money you can get from an equity release in the UK. Here is a list of what will factor into your total loan amount:

1. Home value
2. Current mortgage balance
3. Payment type
4. Interest rates
5. Closing costs

Let’s take a closer look at the factors that determine how much money you get from an equity release:

1. Home value

The value of your property is one of the most significant factors when determining how much money you can borrow with an equity release. Usually, you can get between 40% and 60% of the appraised value of the property. The more your property is worth, the more funds you will potentially be able to access.

2. Current mortgage balance

Your lender may require that you use the proceeds from your equity release to pay off any remaining balance on your main mortgage. That means that if your current mortgage balance is significant, the money you can get from your equity release will be limited.

3. Payment type

Another factor is the type of payments you choose. A line of credit, which lets you withdraw money over a period, like a credit card, will likely offer you more money. Lump-sum payments, meanwhile, offer the smallest amount. If you choose monthly payments, you will be offered payments that fall in the middle of a line of credit and a lump sum.

4. Interest rates

Market interest rates will impact how much money your equity release will get you. If interest rates are low, there will be less interest added to your loan over the long term. In this case, lenders usually offer you a higher loan amount up front. If, on the other hand, rates are high, loan amounts are more likely to be lower.

5. Closing costs

Just like more traditional mortgages, equity releases also have closing costs, which you can pay out of the proceeds of the loan. Therefore, the higher the closing costs, the less you will be able to borrow. It is another reason that you should shop around for your equity release.

Read more: Closing costs in the UK that home buyers should know

Which lenders offer equity releases UK?

Many lenders in the UK offer equity releases, each with its own criteria, which includes the following:

• Age caps
• Loan-to-value ratios
• Early repayment charges

Choosing the best equity release for you is more important than a headline rate, even if rates significantly vary.

To give you an idea of typical rates and age caps, following graph is a breakdown of which lenders offer equity releases in the UK:

Equity release: What to ask your lender

Prior to taking out a reverse mortgage, it is important to understand what you are getting into. Here is a list of questions that you can ask your lender about equity releases in the UK:

• How do I get money from an equity release?
• Which fees will I have to pay?
• What interest rate do I have to pay on the money that I borrow?
• What might cause me to default on the loan?
• What penalties might I have to pay if I sell my home within a certain period?
• How much time do I have to pay off the loan’s balance if I die?

An equity release is essentially a loan that you can take out on your home while still living in it. Now that you know which lenders offer equity releases in the UK, as well as which questions to ask them, you can decide whether it is the right move for you. Remember: while there are many benefits, there are also risks.

Before committing yourself to getting your equity release, do your research, such as checking in on what the best mortgage lenders in your area can do for you.

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