Equity Release is the term used to describe a financial solution that is available in the UK for those who are 55 or over. The term itself covers the financial sector, with Equity Release Schemes, Lifetime Mortgages and Home Reversion Plans being the actual products that are available.

The first thing to note is that equity release schemes, equity release mortgages and lifetime mortgage are all one in the same thing, with the terms being used interchangeably. Each of these products refers to a financial product that releases money for homeowners aged 55 or over. The money is released from the equity in their property, with the amount being based on the property value and the age of the youngest applicant. The amount that can be released starts at around 21% for those aged 55, and increases at approximately 1% per annum up to a maximum of 56% at age 90. The maximum amount available for drawdown will change between providers.

Essentially all equity release schemes operate by releasing a lump sum that can be spent however you wish. Now this may be for home improvements, to supplement ongoing pension income and state benefits, for the holiday of a lifetime, or simply to assist your loved ones such as children or grandchildren.

The options available when releasing equity are either as a maximum lump sum as per the previous percentages, or as a minimum lump sum around £10,000 with the balance being made available as an equity release drawdown facility. Equity release drawdown is usually set to a minimum release of between £2000 and £2500.

After you have released funds, interest is rolled up against the borrowing, generally at a fixed rate of interest for life. This means that you know from outset exactly how the debt will increase over time. For example a lump sum of £10,000 at a fixed rate of 7% will grow to £19672 after 10 years, and £38697 after 20 years once the rolled up interest is added to the original borrowing. Compare this to a lump sum of say £30,000 which would grow to £59,000 over 10 years at a fixed rate of 7%, and the benefit of equity release drawdown option is clear to see.

It is worth noting that different providers offer the option to protect a portion of the property for those wishing to protect an amount for inheritance, i.e. protecting 50% of the property value. This certainly provides peace of mind, but will reduce the maximum amount that can be released from the property as the aforementioned percentages would be based on the reduced amount of the unprotected portion of the property.

Equity Release Lifetime Mortgages really can provide a solution for those that are asset rich but cash poor, and can make the difference between just getting by, or actually living and enjoying retirement and old age.

They’re not for everyone though, and obtaining advice from one of the many equity release advisers in the market is to be recommended. This will help provide you with an appreciation of both the pros and cons associated with Equity Release. For example: -

Pros

You can remain living in your property for the rest of your life
There are no monthly payments to be made
The debt is repaid only when the last surviving applicant passes away, the property is sold, or a move into long term care.
No negative equity guarantees ensure you can never owe more than the property is worth

Cons

Releasing equity can affect entitlements to means tested benefits.
As interest rolls up over time, the reduction in equity could make it difficult to move home, or downsize.
As the interest rolls up the amount that can be left to your beneficiaries reduces.

Home Reversion Plans

Unlike Equity Release schemes where you retain complete ownership of the property, Home Reversion Schemes work on the basis that you can sell anything from 20% to 100% of your property to the Home Reversion Company, with any amount not sold, being held in trust. Home Reversion is only a small part of the Equity Release market, as many people view them as being poor value. With other equity release schemes you benefit from any capital growth in the property as you retain ownership, whereas once you have sold a percentage of your home to a reversion company, any increase in the value of that portion belongs to them alone.

As with all financial products there is rarely a perfect solution, and so seeking advice from an adviser is likely to be time well spent.

For those considering Equity Release as a way of supplementing their income in retirement, there are a number of factors that need careful consideration. One of these is the property value, and whether it will provide a sufficient lump sum for immediate release or to have as an equity release drawdown facility.

Talk to any adviser, and they will tell you they have experience of submitting their clients application and valuation fee only to find that the surveyor down values the property, upsetting all the plans and expectations of the client.

From the advisers point of view this just means additional work, a new Key Facts Illustration and a change to the equity release application. For the applicant however, it could mean that the case does not proceed if the funds available would be insufficient for their needs. This could mean paying for a valuation that can not be used.

It is therefore vitally important that before completing an application for a lifetime mortgage or any other equity release product, you seek the advice of a qualified equity release adviser. Even if the adviser does not provide a home visit, they are well versed in carrying our research online to get a good idea of the value of the property so that you do not fall victim to the surveyor’s pen.

As well as seeking advice from an equity release adviser, the internet provides a good deal of information that you can access to ensure you have a realistic idea of current property values yourself. Websites like Rightmove, OurProperty and Mouseprice, which are available to the general public, allow you to see actual property sale prices within your own postcode and surrounding area. The information on those types of websites is taken from the Land Registry’s data and provides a much more reliable guide to what a property is worth. As we all know the asking price advertised is seldom the sales price achieved.

Seeking advice on the subject of house values really can reduce the likelihood of disappointment, and the risk of a wasted valuation fee. Whilst it’s not possible to predict the valuation figure a RICS surveyor will arrive at with 100% certainty, as property sizes, styles and values can vary even between adjoining streets, knowing the ballpark that your property value is in, really can save disappointment later on.

A note of caution. Many people choose to request a market appraisal from their local estate agent. This in itself is not a bad idea, but all too often provides a view of the asking price rather than the likely selling price. If looking to your local Estate Agent you should ask for the anticipated selling price as well as the asking price. After all, the valuer appointed by the equity release provider, will not use asking prices when looking at comparable properties to arrive at his valuation. He will rely on properties of similar type that have been sold within the last 3 to 6 months.

If having completed your own research, you find you believe your property value to be higher than the adviser’s assessment; it may be worthwhile playing devils advocate, and asking yourself the following questions.

• How have you arrived at your figure?
• Which local properties have they used as comparisons?
• Is your property the same in size and style?
• Is your property located in a better or worse position?
• Is your property in the same condition, better or worse?

These questions represent the type of thoughts the valuer will have when reaching their final figure. Bear in mind that if you are too conservative, there is every likelihood that the valuer will provide a higher valuation.

For many who are retired, or nearing retirement in the UK, living on insufficient pension, and personal savings is a very real prospect. This can be frustrating, especially when you have cash tied up in your property that would be of much greater benefit if it were in your pocket. A solution that could alleviate the situation by releasing some of the cash tied up in your home is a Lifetime Mortgage.

For those in this situation, there can be any number of reasons for considering a Lifetime Mortgage to release some of the equity tied up in your home. A common reason that equity is released from the home is to help improve quality of life. Funds can just as easily be used for the purchase of a new car, a holiday of a lifetime, home improvements or house alterations, to help a child with a deposit for their first home, the reasons for equity release are endless. Whatever money is borrowed is secured against the property and then simply repaid from the sale proceeds of the property after death or a move into long term care.
When considering a Lifetime Mortgage or Equity Release in general, it is worth noting that;

- You can continue to live in the property throughout your lifetime.
- There is no tax payable on the money released from your main residence
- The money can be used for any legal reason
- You can receive a single lump sum, a regular drawdown or even both
- Using a SHIP registered provider ensures you have protection
- No monthly payments are made as interest is added to the principle loan

Lifetime mortgages are not an ideal solution for everyone though, and so seeking independent equity release advice is highly recommended. All advisers are regulated by the Financial Services Authority these days, and the mortgage providers can only accept business from fully qualified advisers, as part of their SHIP membership.

Independent advice ensures alternatives such as downsizing, or whether home improvement grants may be available for those considering alterations, are considered. In addition calculations would be run to check what if any entitlement to means tested benefits could be affected.

Means tested benefits such as pension credit, council tax benefit and pension savings credit can be affected if the amount released takes your savings above the £10,000 limit. In cases where the money is not retained in savings but spent, then this does not apply. On the other hand, if the money released was then invested, a liability to income tax could arise on the income or the growth (Capital Gain).

It is also worth noting that money released through a Lifetime Mortgage could reduce the level of inheritance that you are able to leave. In addition the responsibility for the upkeep of the property remains with you, as well as the need to keep valid buildings insurance in place throughout the Lifetime Mortgage.
With a proper balanced review of the pros and cons, many people have found a lifetime mortgage to be and effective way of releasing capital in their home, enabling them to enjoy the life they wantin retirement. Therefore, it may prove beneficial to investigate the options available to you and speak to a financial advisor to make sure you fully understand the features and risks of equity release.