What Is Equity Release?

EQUITY RELEASE, THE KEY TO UNLOCK THE VALUE OF YOUR HOME

Equity Release can free some of the capital tied up in your home, while you continue to live there. This money can be in the form of a tax-free lump sum, a regular income or a combination of both. And there are no restrictions on how you use the money.

Background

Equity Release has been around in one form or another since the 1960s. In 1991, the leading Equity Release providers formed S.H.I.P. or Safe Home Income Plan, whose members follow a code of conduct to ensure customer safety. And since 2007, all Equity Release Schemes have been fully regulated by the Financial Services authority. The new rules surrounding Equity Release make two guarantees to homeowners. Provided you keep to the terms of the agreement, you can never be turned out of your home and your children can never find themselves in a negative equity situation.

Occasionally, there are stories in the papers where equity-type schemes have had tragic consequences for homeowners. However, these stories are frequently about different types of product or, if they are about Equity Release, they relate to plans which were taken out a long time ago and which could not be sold under the new rules. See our Urban Myths page for more details.

TWO TYPES OF SCHEME

The two main types of Equity Release schemes are a Lifetime Mortgage and Home Reversion.

Lifetime Mortgage

A Lifetime Mortgage is a loan against the value of your home and can be taken as a lump sum, a monthly income or both. No capital and interest repayments are made until the property is sold. Instead, the interest is rolled up and added to the total amount of the loan. Some Lifetime Mortgage providers allow you to take the capital in stages called 'drawdown'. The benefit of 'drawdown' is that the interest only becomes payable when you actually take the capital. So the total debt builds more slowly and interest grows more slowly as well. Although there is no guarantee that property values will rise in future, any rises in property value will offset the effect of the rolled up interest on the loan.

Advantages Disadvantages
  1. You will have a substantial lump sum or regular income to spend as you wish, without making any interest payments until the scheme ends.
  2. You still own your or house so will benefit from any increase in value.
  3. The plans are available to borrowers as young as 55.
  4. You can still move home if you wish.
  5. You don't make have to a monthly repayment, although you may be able to do so.
  6. You can elect to 'protect' a percentage of the eventual sale of your home so ensuring a guaranteed inheritance is available to your beneficiaries.
  7. It may be possible to draw higher amounts if you are in ill health.
  8. All SHIP members have a No Negative Equity guarantee and providing you do not break the terms of the agreement, there is a No Repossession guarantee.
  9. Some providers offer Interest Only mortgages, which would require a monthly interest payment. The advantage of this arrangement is that, so long as the payments are maintained, the debt does not increase over time.
  1. The loan debt accumulates rapidly. The younger you are when you borrow the money, the greater the potential debt due to greater life expectancy.
  2. The value of your estate is reduced, leaving less for your beneficiaries.
  3. Interest rates may be high due to the long term nature of the loan.
  4. Further loans may not be possible.
  5. There may be early redemption costs.
  6. When you take out the mortgage it isn't possible to know how much the final cost of the mortgage will be.
  7. Equity Release may effect your eligibility for means-tested state benefits like guaranteed pension credit and savings pension credit.

Home Reversion

A Home Reversion scheme means selling all or part of the equity in your home to a reversion company.

You may not receive full market value, because the reversion company also gives you the right to live in your home rent free for the rest of your life. However, there are now reversion companies who will allow you to draw the maximum share for your age, gender and property value for a percentage share in your property.

When the property is sold, usually on death, the reversion company receives its share of the proceeds of the sale. So, for example, if you sold a 50% share of your home, the reversion company receives 50% of the proceeds when it is sold.

Advantages Disadvantages
  1. You will have a substantial lump sum or regular income to spend as you wish.
  2. You don't have to make a monthly repayment.
  3. You will not build up any debt.
  4. Beneficiaries know the proportion of your home (if not the value) that they will receive from your estate.
  5. Unless you have sold 100% of your property, you continue to share in the rise in value of your property.
  6. You can take further cash depending on the amount you originally sold.
  7. Minimum age is 65.
  8. You can usually draw more from a Home Reversion scheme than a lifetime mortgage.
  9. It is usually possible to draw higher amounts if you are in ill health.
  1. It will reduce the value of your estate and therefore the amount left to your beneficiaries.
  2. If you die soon after starting the plan, you could have effectively sold off your house (or a share of it) cheaply. Some schemes may give a rebate if death occurs within the first few years of the start date.
  3. Some schemes can take a long time to arrange, and some companies are very selective about the properties they consider.
  4. Equity Release may effect your eligibility for means-tested state benefits like guaranteed pension credit and savings pension credit.

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