Most commonly used as a means of bolstering income in retirement, equity release is the name given to the selection of products that allow you to access the cash tied up in your property. Equity release products are divided into two main types, and are available only to those aged 55 and over.
A lifetime mortgage is the most common type of equity release. It is very different from a normal mortgage, which requires you to make payments while you are alive. With a lifetime mortgage, you don’t need to make any while you are living – unless you move house.
Instead, interest is accrued over the period of the mortgage. The full amount and interest is then repaid after you die or when you move house.
While these broad rules apply to all lifetime mortgages, plans can vary substantially in their details. For example, many plans will specify an older minimum starting age than is legally required. 60 and 65 are starting ages, as opposed to the lower 55.
Similarly, interest varies too – and not just in terms of how much you will be charged. Some plans will allow you to pay some or all of the interest, which has the result of making the mortgage less costly. The other side of the coin is that to secure this kind of lifetime mortgage, you will often have to go through a greater variety of financial checks. These can include income assessments and whether you can afford to make regular payments.
Also worth bearing in mind is that you will only be able to borrow a certain percentage of the value of your property – 60 per cent is a common upper limit. Typically, the older you are when you take out the plan, the more you can borrow.
How you receive your equity can also vary between plans, and is an important consideration for anyone thinking of taking one out. Depending on the plan you choose, you may need to draw it as a lump sum, or be able to access smaller amounts as and when you need them. This also affects the level of interest you pay, as drawing smaller amounts means you only pay what you have taken out.
The second equity release option is home reversion. This is a very different kind of plan, which allows you to sell either some or all of your home to a home reversion provider. Even though technically you will no longer own the portion of the house that you have sold, you can remain living in it for the remainder of your life. And, as with a lifetime mortgage, you will receive cash in exchange. This can come in the form of a lump sum or regular payments.
While you will be selling all or part of your home, with a home reversion plan you will not receive its entire market value. Typically, it will be between 20 and 60 per cent of the market value of the part you sell.
As with lifetime mortgages, individual plans can differ substantially in their details. Again, you might find the minimum age at which you can take out certain plans is closer to 60 or 65 than 55, while deals tend to get more competitive the older you are.
Whichever equity release product you are interested in, it is important to seek independent financial advice before proceeding. This will help you understand the advantages and disadvantages of such schemes, which products may benefit you most and, ultimately, if equity release is the right move for you.