Equity Release - Malvern Equity

What are equity release mortgages?

Equity release mortgages let you use some of the money (equity) locked in your house. You only need to repay this money when you pass away, enter long-term care, or sell your home. This way, you can get some extra money for your retirement years without having to leave or sell your house.

There are two main kinds:

Lifetime mortgages: This is when you get a loan using your home’s equity.
Home reversion plans: This involves selling a part or all of your home but still living there until you pass away or need care.

You must be at least 55 years old to get into these schemes, and for home reversion plans, you usually need to be 65 or older.

The interest on lifetime mortgages can be high and adds up fast because it’s compounded, making the debt increase quickly. However, reputable companies often promise that the debt won’t exceed your home’s value, so you won’t risk leaving your family with debt more than the house is worth. Still, this means you might have less to leave as inheritance.

Equity release might be a helpful way to boost your retirement funds, but it’s not the best option for everyone.

How does equity release work?

Equity release lets you use the money that’s tied up in your home until you need long-term care or pass away.

With a lifetime mortgage, you secure a loan against your house, which can be given to you in a big payment or in smaller, regular amounts. The best deals for these kinds of loans usually go to older people.

If you choose a home reversion plan, it’s a bit different because you actually sell part or all of your house for less than its full market value.

The value you get from these deals tends to increase with age, so even though you can start looking into home reversion from age 65, it’s often a better match for those who are over 70.

It’s important to know that equity release isn’t the same as remortgaging. Remortgaging also lets you get to the capital in your home, but you have to make monthly payments back, which include interest and paying down the original loan.

With a lifetime mortgage:

You still own your home and are responsible for any upkeep
Your loan comes with a high rate of interest, which is compounded each day
You don’t have to make any repayments now – in most cases, you pay both the capital plus all the interest owed at the end of the term (usually when you go into care or die)

With a home reversion plan:

You can continue living in your home as a tenant.
There’s no rent required from you.
However, you’ll typically receive only about 20% to 60% of your home’s market value, which varies based on your age and health condition.

Equity release schemes explained

Lifetime mortgages

Lifetime mortgages are loans that use your home’s value as security. They’re for homeowners 55 and older, allowing you to borrow money at a high interest rate. This money doesn’t need to be paid back until you move into a care facility or pass away. Then, the loan and all the interest are due.

The interest on these loans compounds, so it adds up fast. However, you can pick a plan that lets you pay off the interest each month. The best options come with a guarantee that you won’t owe more than your home’s worth. With a lifetime mortgage, you keep full ownership of your home.

Home reversion mortgage

A home reversion plan means you sell some or all of your house to the provider for a one-time payment or regular payments. You’ll get a lot less than what your home is really worth – usually around 20% to 60% – and what you’re offered depends on your age and health. You can still live in your home without paying rent until you pass away or move into care.

When the plan ends, usually after you pass away or enter residential care, your home is sold. The money made from the sale is then split between you and the provider. This type of equity release is typically available to people older than 65.

Who is eligible for an equity release mortgage?

Equity release is an option exclusively for older homeowners. To be eligible, you should:

Have your own home, typically mortgage-free, though some lenders might accept a small remaining mortgage.
Be at least 55 years old for lifetime mortgages and at least 65 for home reversion plans, with some deals possibly requiring an older age.
Keep your home well-maintained.
Be able to cover related expenses, including arrangement fees, valuation fees, completion fees, and legal fees.

It’s important to consider that equity release might not be the best choice if you have dependents still living with you.

Advantages and disadvantages of equity release mortgages

Pros

You can access cash without needing to move or downsize.
It allows you to use your home’s equity to increase your income.
Guarantees against negative equity and options to protect a portion of your home’s value can reduce the impact on your inheritance.
There’s no requirement to pay back the loan as long as you’re alive and residing in your home.
Some plans offer the option to pay back interest or some of the loan to reduce overall costs.

Cons

Lifetime mortgages often have high interest rates, causing the debt to accumulate rapidly.
Your family will inherit less due to the loan.
The property is usually sold to settle the loan.
Home reversion plans offer less money than what you might get from selling your house on the open market.
You might lose eligibility for means-tested benefits like pension credit and council tax support.

How much equity release can I get from my property?

The amount you can release through equity depends on your home’s value and the type of equity release product you choose.

If you’re not sure about your home’s value, you can use property portals or talk to estate agents for a quick, free estimate. Your available equity is this estimated value minus any outstanding mortgage, though lenders might calculate this slightly differently.

For a lifetime mortgage, you’re generally able to access between 25% and 60% of your equity. The amount you can borrow typically increases with your age.

In the case of home reversion schemes, you’re likely to be offered between 20% and 60% of the value for the portion of your property you sell to the provider. As with lifetime mortgages, being older usually means you’ll get a better offer.

What else should I know about equity release mortgages?

When you’re checking out ways to access the money tied up in your home, make sure you go for plans or companies that have the thumbs up from the Equity Release Council (ERC). Plus, you’ll want to pick equity release providers that follow the rules set by the FCA (Financial Conduct Authority). You can hop onto their register online to see for yourself.

Interest rates on lifetime mortgages – These usually lean on the high side, so comparing different equity release options is a smart move. A lot of the time, companies offer fixed interest rates, but there are some with variable rates too.
A no-negative-equity guarantee – It’s really important that any equity release plan you choose promises you won’t end up owing more than your home’s worth when it’s sold, even if property prices dip. This is called a “no negative equity guarantee” and it means your family won’t be stuck paying back more than the house sells for.
Interest payments – Check if the plan lets you pay off some of the interest as you go. Being able to do this can significantly reduce the overall cost of tapping into your home’s value.
Minimum withdrawal sum – Find out if there’s a minimum amount you can pull out monthly or in a lump sum. Knowing this helps you understand the full cost of accessing your home equity.
Below market rates – If you’re looking into home reversion schemes, remember you’ll get less than what your home might fetch on the open market. It’s not a fee you pay upfront, but it’s still a cost to consider.
Losing benefit entitlement – Having a larger balance in your bank can affect the benefits you get, including those for care costs. The worth of your house isn’t counted if you’re living in it – but money in the bank is.

What costs are involved in equity release?

When you’re exploring equity release, there are several costs you should keep an eye on. These include the interest you’ll pay on a lifetime mortgage and the potential loss from opting for a home reversion scheme. Additionally:

Arrangement or application fees – While some plans don’t have any fees, others might set you back by hundreds.
Solicitors’ fees – What you’ll pay for legal advice can really vary. It’s a good idea to compare rates and ask for recommendations before choosing a solicitor.
Valuation fees – This is the charge for assessing your home’s value to determine how much can be borrowed. You’ll need to pay this fee upfront when you apply, and it’s not refundable.
Completion fees – These fees are for the admin involved in getting your mortgage ready. They might also cover legal costs from the lender and any fees for transferring the mortgage.
Adviser fees – The amount you pay for financial advice can differ a lot, with some advisers charging quite a bit. However, getting advice is key to figuring out if equity release is the best move for you, so it’s worth looking around for an adviser that suits your needs.

Alternatives to equity release

Remortgaging involves borrowing against your home’s value and repaying this amount over time. Like your initial mortgage, your monthly payments will cover both interest and the principal debt. Some lenders have age restrictions, which could limit your options. Check our remortgage comparison page to explore available deals.
Accessing your pension: If you’re over 55, you can access money from any defined contribution pensions. The best method depends on your situation. You could buy an annuity for a guaranteed lifelong income, but they often provide less value. Alternatively, you can take up to 25% of your pension as a tax-free lump sum, or skip the lump sum and receive 25% of your withdrawals tax-free each year.
Downsizing might be an option if you’re living in a large property and considering a smaller, less expensive home. However, do the math carefully to ensure the savings are worthwhile, especially after considering stamp duty, agent fees, and moving costs.
Rent a Room scheme: If you have a spare furnished room, consider renting it out tax-free up to £7,500 a year through the government’s Rent a Room scheme. This can be a great way to earn extra income without needing to sell your property or take out loans.

Can I get equity release advice?

Before you consider equity release from your home, getting professional advice could be a valuable move.

It’s important to understand how an equity release mortgage impacts the equity in your home and what it means for the inheritance you wish to leave your family.

Consulting with a specialist equity release mortgage broker or an independent financial adviser (IFA) can provide you with a balanced view of the advantages and disadvantages of equity release. They can help you figure out if it’s the right choice for you.

If you decide it’s the right path, an adviser can also guide you to the best equity release deals tailored to your specific needs.

FAQs

Can I start an equity release plan if I’m younger than 55?

Unfortunately, no. You generally need to be at least 55 to qualify for a lifetime mortgage, and for home reversion schemes, the age requirement is often 65. Plus, the older you are, the better the deals you might be eligible for.

Are equity release plans secure?

Yes, they’re overseen by the Financial Conduct Authority (FCA) and the Equity Release Council (ERC), which enforce regulations and standards. It’s wise to look for plans offering a “no negative equity” guarantee and to consider seeking expert advice.

What’s the process when the borrower passes away with an equity release loan?

Upon death, the equity release balance must be settled within a year. Typically, this is handled by selling the property, but heirs have the option to pay off the debt and retain the property if financially feasible.

How much risk is involved with equity release mortgages?

The risk mainly lies in the debt’s growth due to compound interest, potentially leaving little to no equity once the home is sold. However, certain plans allow for safeguarding a portion of the home’s value for heirs, and choosing plans with a no negative equity guarantee prevents owing more than the home’s worth.

How is interest managed for equity release?

You can handle equity release interest in two ways:

Deferring the interest means letting it accumulate and then settling it once the home is sold, which can significantly increase the debt over time.
Paying interest as you go helps avoid the debt snowballing from compound interest. Opting for gradual income instead of a lump sum also reduces the accruing interest.

Can I sell my home if it’s under an equity release mortgage? Yes, most plans allow for transferring the mortgage to a new property, provided it meets the lender’s standards. Be mindful of potential early repayment fees.

What are the drawbacks of equity release?

Equity release means less inheritance for your family and could result in the equity release firm owning your home. The longer you live after releasing equity, the larger the debt grows. Also, there are various fees involved, and increasing your financial assets could affect your eligibility for certain benefits.

Can my partner or spouse remain in our home after I die?

If the equity release plan is joint, your spouse or partner can stay until both of you either pass away or move into care. Without a joint plan, the surviving partner may need to leave if the plan holder dies or requires long-term care.

What does a negative equity guarantee entail?

This guarantee ensures you or your heirs won’t owe more than your home’s value, even if the property’s market value drops below the loan amount.

Will getting an equity release mortgage impact my state benefits?

Yes, it can affect your eligibility for means-tested benefits due to the increase in your monthly income or savings.

Get started