Content Writer
Senior Equity Release Advisor
If you’re a homeowner over 55 and want to release some of the cash in your property, an equity release scheme could be the right option.
Here, you’ll find out how equity release schemes work, how much you could release from your home and what other alternatives are available.
How does equity release work?
An equity release scheme offers a homeowner over the age of 55 a way to access the capital in their property without having to sell it. You can use this tax-free cash to supplement your income in later life, fund a specific event, like a holiday, or help your children buy a home.
With equity release, monthly repayments are not mandatory. The amount borrowed is usually repaid when you die or move into a care home, using the proceeds from the sale of your property. For joint policies, this would occur after the death of the last surviving policyholder.
There are two main types:
- Lifetime Mortgage: This is the most common form of equity release and allows you to borrow against the value of your home while still retaining ownership. Interest is added to the amount borrowed over time at either a fixed or capped variable rate.
- Home Reversion. With this plan you sell a percentage of your home to a provider in exchange for an immediate lump sum or regular income and retain the right to live there rent-free.
The key difference between the two types of equity release is that with Home Reversion, there is no loan to repay, but you are giving up full ownership rights to your home. The percentage split agreed upon is divided between the provider and the homeowner’s estate upon their death or, if they move into long-term care, once the property is sold.
With a lifetime mortgage, you have much more flexibility. Most providers offer the option of monthly repayments if you wish to avoid the interest rolling up too high. This empowers you to manage your finances according to your needs and preferences.
Do you need to take professional advice?
Yes. Regardless of which option you feel suits you best, taking professional advice before you decide is not only highly recommended but also a legal requirement.
As a member of the Equity Release Council (ERC), our advisors are highly trained and experienced in this type of home loan. This ensures that you are guided and supported throughout the equity release process.
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How much equity can you release?
The amount you can release will depend on several factors, such as:
- Your age
- The value of your property
- The loan-to-value ratio (LTV) offered by a provider
- Your current health condition and lifestyle
You can use our calculator below to get a rough idea of how much equity you can release based on your age and property value.
Example calculations
The table below provides more illustrations of how much you may be able to borrow based on a specific age and property value.
|
Property Value |
Age (based on youngest homeowner) |
Amount you could release |
Maximum loan-to-value (LTV) |
|
£250,000 |
65 |
£107,500 |
43% |
|
£500,000 |
60 |
£190,000 |
38% |
|
£750,000 |
70 |
£360,000 |
48% |
|
£1,000,000 |
55 |
£310,000 |
31% |
The above information is purely for illustration purposes only. For an accurate quote based on your circumstances, get in touch with one of our equity release advisors.
Criteria for equity release
The typical criteria required for an equity release scheme are as follows:
- Age. The minimum age requirement for most providers is 55 (some may go as low as 50, and others could be higher). The older you are, the more equity you can release.
- Property value. The amount you can release is based on a percentage of your property’s current market value. Most providers will have a minimum value requirement (usually starting from £75,000).
- Property location. Your house must be located in the UK and owned on a freehold basis.
- Health and lifestyle. If you suffer from certain health conditions, a provider may offer enhanced terms that allow you to release more equity from your property. This can also be the case based on particular lifestyle choices.
- Outstanding mortgage. Whilst providers will allow for a mortgage to still exist on your property, most will prefer the amount and term remaining to be low.
Once this information is known, providers will use the above criteria to calculate the maximum loan-to-value (LTV) they are willing to offer.
How interest is charged
It’s important to consider how interest is charged on equity release schemes before making any final decisions. In almost all cases, the interest accrued will simply roll up on top of the amount you’ve borrowed, compounding over time.
When the time comes to repay the loan, the amount you initially borrowed, plus the accrued interest, is calculated as a final sum. If you live for a long time after you released the equity, the amount to be repaid can be pretty high in relation to its value.
However, due to the ERC safeguards in place, particularly a negative equity guarantee, the amount to be repaid should never be higher than the value of your property.
There is usually an option made available by equity release providers for you to make voluntary regular interest repayments during your lifetime to reduce the impact compounding can have over a long period. This is worth considering if you have sufficient disposable income.
Interest is typically charged on either a fixed-rate or capped variable basis. For fixed rates, you’ll always know how much you'll be charged. For capped variable rates, the rate can fluctuate but only between pre-determined parameters.
Is equity release right for you?
To consider whether these types of schemes are suitable for you, it’s essential to weigh the pros and cons of equity release. They are summarised in the table below.
|
ADVANTAGES |
DISADVANTAGES |
|
Access to a tax-free cash lump sum and/or regular lump sums as and when needed |
Reduces the size of your overall estate |
|
No mandatory requirement to make regular monthly interest payments |
Interest charges and associated fees can be relatively high over time |
|
Retain full ownership of your home (Lifetime Mortgages) |
Lose overall ownership rights for your home (Home Reversion) |
|
No possibility of negative equity when the amount is repaid |
Potential impact on means-tested benefits |
You can read more about the pros and cons of equity release in our standalone guide.
Considering all of the above, it is a legal requirement to seek professional advice before making a final decision about whether equity release is the best option for you.
Our advisors can help! Their consultation will cover assessing your eligibility and how much you could borrow. They will also take an in-depth look at your specific financial goals and outline the associated risks and implications involved.
Get started on your equity release journey
Whether equity release is the right step for you or an alternative option is more suitable, we can help you make a decision that best suits your circumstances.
At Teito, we understand that decisions such as this require a lot of thought. It’s important for you to take your time and not make rash decisions. Our advisors will provide you with all the assistance and clarity you need, taking into account any long-term impact on your estate and beneficiaries.
Here are some of the reasons people choose Teito for their equity release needs:
- Your initial consultation is FREE with no obligation to proceed
- Teito is a fully-fledged member of the Equity Release Council
- Our advisors can take you through the application process from start to finish
- We are rated 5-star on leading review websites
Ready to get started with an independent equity release advisor? Fill out our quick form to book your free, no-obligation consultation now.
FAQs
Yes, potentially if you receive means-tested benefits such as pension or universal credit. This is why it’s best to take professional advice before you proceed.
Choosing an Adviser
Selecting a qualified and experienced mortgage adviser is of great importance. To choose a suitable adviser, evaluate their qualifications, experience, and reputation, and ensure they are regulated by the Financial Conduct Authority (FCA).
Read reviews from previous clients and make sure they provide a clear explanation of the products and services they offer, as well as the fees and charges associated with them.