As you get older or retire, financing those larger purchases and treats can seem like an impossible dream. Buying a new car, making some home improvements, or even funding a trip of a lifetime may all seem just wishful thinking. In 2016 over 27,000 people* brought their plans to life with equity release.
How does equity release work?
If you’re 55 years old^ or over and own your own home in the UK, worth at least £70,000^, you are likely to be eligible for an equity release plan. Equity release allows you to access some of the cash in your home’s value to pay for both those essential and special items without you having to move house. The cash you release is tax-free. And if you’re worried about leaving behind an inheritance for your loved ones, with some providers it is possible to release equity and still guarantee an inheritance.
There are two main types of equity release plan:
1. Lifetime Mortgage
A lifetime mortgage is a type of loan, secured against your home. It allows you to release a tax-free cash lump sum (or, with some plans, take smaller amounts as and when you need them) from the value of your property. When you die or move into long-term care, the property is usually sold and the lifetime mortgage paid back.
Like with most loans interest is added, so the amount you pay back will be greater than the initial loan amount. The fixed interest rate agreed at the time you take out the plan builds up as compound interest over the years. You may qualify for an enhanced lifetime mortgage, depending on your lifestyle and medical factors, which are taken into consideration on application of the plan. It could allow more cash to be released from your property than a standard lifetime mortgage.
You could qualify based on one or more of the following:
- Being a smoker
- Weight concerns
- High blood pressure
- Diabetes requiring medication
- Medical conditions such as angina, heart attack, cancer, multiple sclerosis or Parkinson's disease
- Retirement due to ill health.
2. Home Reversion
Home reversion plans involve selling all, or part of your entire home, to a home reversion provider in return for a cash lump sum. This is usually higher than the sum you can raise from a lifetime mortgage. While all or part of your home will belong to a home reversion provider, you can remain living there for the rest of your life.
A home reversion plan is not a loan and so there's no interest to pay. However, if your property increases in value, you will only benefit from the increase in value of the proportion you still own. When the property is sold, the reversion company receives its share of the sale proceeds.
What can you use equity release for?
Once you’ve released some of the cash from your home, you can spend it on almost anything you wish, perhaps improving your home or buying a new car.
How is the equity release industry regulated?
From 2007, all lifetime mortgage and home reversion plans became regulated by the Financial Conduct Authority, or 'FCA' (formerly known as the Financial Services Authority, or 'FSA'). The FCA has clear guidelines to help regulate the sale of equity release products to you.
Any financial adviser providing advice on equity release has to pass a series of professional exams to be able to advise customers. This includes spelling out the advantages and disadvantages of the plan, telling you how it will affect your entitlement to state benefits, and outlining the fees payable for any advice you receive.
Any firm providing you with advice on equity release should give you two documents. One outlines important information about the service they provide and what it will cost you; the other is provided when a product is recommended to you and this is called a Key Facts Illustration. This sets out all the features and risks of the equity release plan, so you can compare it with similar products.
You should only ever get advice on equity release from a company that is registered with the FCA (you can check on the FCA Register here). If they aren’t registered and things do go wrong, unfortunately you won't have access to the Financial Services Compensation Scheme or the Financial Ombudsman Service.
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*Equity Release Council figures, 2016
^Minimum age and property value varies between providers.