Equity Release Jargon – 9 Equity Release Terms Explained

We know that the stream of jargon in equity release articles can put off potential consumers of equity release as it is difficult to understand.

However, instead of letting this deter you, we are here to equip you with the knowledge you need to understand equity release. This will put you in a better position to research your options and ensure you are not being scammed.

Here are 9 equity release terms explained in Plain English for people interested in releasing equity.

What is an Equity Release Loan?

The first term we need to discuss is equity release, as before you understand this, no other terminology will make sense.

When you release equity from your home, you are using the value of your property to earn money right now, rather than waiting until the house is sold.

You will take out a loan secured against your property and either receive money each month or as a single transaction. The money released is tax-free and can be spent on anything of your choosing.

The idea is that older people can do this when they are struggling financially, and instead of being required to pay back the money each month, they can relax as the money will be taken when the house is sold.

This will either be when the consumer passes away or when they go into long-term care.

Equity release helps people who do not have as many savings as they hoped they would have – it’s a way to ensure you are earning enough money to enjoy life before or during your retirement without risking getting into uncontrollable debt with credit cards.

People looking to release equity must be over 55 years old, they must own their own home in the UK, and this home must be worth at least £70,000.

What is an Equity Release Provider?

An equity release provider is an organisation that offers lifetime mortgages and home reversions.

We advise that you select a prestigious firm that is regulated by the financial conduct (FCA) and a member of the Equity Release Council (ERC) to ensure you are protected against scams.

If you are unsure which company to go with, you can book in to speak to an unbiased financial adviser who will explain the benefits and drawbacks of each one in relation to your current situation.

We can do this for you if you contact us and explain that you are interested in equity release.

What is a Lifetime Mortgage?

This type of mortgage is untraditional in the sense that it does not require monthly payments, but as with all equity release, the loan that is secured against the house is designed to be repaid when the property is eventually sold after the consumer has passed away.

The loan that you take out usually has a fixed rate of interest, but there are variable interest rates depending on the specific plan you select.

This means you can intentionally select a plan with lower interest, and the interest accrued over time will be lower.

Some examples of lifetime mortgage plans are: enhanced plans, drawdown plans, voluntary repayment plans, and interest-only plans.

With a lifetime mortgage, the owner remains the owner until they pass away, and so they are expected to live in the house permanently.

Some plans will allow you to move out, but it depends on the conditions you agreed to at the beginning. This is why it’s so important to carefully consider the plan you want to have.

What is a Home Reversion?

A home reversion is the second type of equity release, and with this scheme, you sell your home, or a portion of it, to an equity release firm, which will receive a portion of the gain from your property sale when you die.

In the meantime, you will live in your house without paying rent and you will be given a tax-free amount of money (or partial payments) that you can spend on whatever you choose, including home repair, holidays, and bills.

The money you receive will be lower than the market value of your property.

Home reversion clients must be at least 65 years old, but clients that are older than this tend to receive a higher loan. Usually, your income is not a factor, but sometimes there will be affordability and credit checks.

If you opt for this scheme, you will no longer be the sole homeowner of your property, which does affect any inheritance you may want to arrange. However, you can choose to protect some of your home for your relatives to benefit from.

What is a Lump Sum of Tax-Free Cash?

Receiving a lump sum of money simply means you are handed all of the money at once rather than being paid in regular instalments. With an equity release scheme, this payment will always be free of tax.

This is great for people who need to pay for one single project, such as a big family holiday or a home renovation – anything that is urgent and needs to be paid for soon.

On the other hand, some people prefer instalments as they need some additional money to tide them over every month, and receiving all of the money in one go may not be a wise financial decision.

This option may also lead to less interest being charged, as it is only charged on the money that is withdrawn, whereas a lump sum of money may be high in interest.

What is an Early Repayment Charge and Why is it a Disadvantage of Some Schemes?

With many equity release plans, you are expected to stay with the scheme for the rest of your life, so early repayment is not appreciated by the firm.

For this reason, they may charge you a significant amount if you try to pay back your mortgage loan before it is due. This percentage tends to be 25% of the loan.

If the conditions of your equity release plan include a payable loan, and you decide to repay early so that you can take out a different mortgage, you are free to do this. However, it is not recommended due to the financial burden that comes with this decision.

To avoid this, try to do your research before diving into equity release, and ask a financial adviser to explain all the risks that come with the release of equity from your home.

The early repayment penalties are often severe, so you’ve got to be confident with your plan rather than making a spontaneous decision.

If you want to contribute towards the full amount of the loan, you could opt for something like a voluntary repayment plan, where this is already included as part of the plan rather than being perceived as something negative.

What is Downsizing?

Downsizing is something that people may decide to do instead of releasing equity and borrowing cash. If you need to make a change to gain more financial stability, you could move into a smaller house with a more affordable mortgage and/or less expensive bills.

This decision may be less risky than releasing equity as you don’t have to take out a loan and therefore you will not be in debt.

However, some people are not in the position to move in the later stages of life, or perhaps they cannot find a house that would accommodate them, so they prefer to release equity.

If they don’t have any dependents, equity release may be the best decision as they don’t need to worry about the money they’re leaving behind.

What is a No Negative Equity Guarantee?

Before we explain what a no negative equity guarantee is, you will need to know what negative equity is. This is best explained through examples.

Let’s say a consumer of negative equity has gone into long-term care and their house needs to be sold, but the house has decreased in value significantly over the past ten years.

When the house is sold, the proceeds do not cover the loan that the consumer has taken out, which means the firm loses out.

With negative equity, the default position is that the consumer would have to pay the difference between the sales revenue and the loan. However, a no negative equity guarantee, which is provided by many plans, means the consumer does not have to pay anything extra.

So, if you opt for equity release, the future value of your home does not have to concern you. No matter what the property market looks like in the future, you can trust in the scheme you have selected, and you are safe in the knowledge that no additional money will be owed.

What is a Loan-to-Value Ratio?

This term is used in the context of any loan, so you may have heard of it outside the context of equity release.

A loan-to-value ratio is a figure that demonstrates how risky it is for a lender to offer a consumer a loan, based on the value of the homeowner’s property.

A low LTV ratio tends to mean low risk, so you could be paying less interest. On the other hand, high LTV ratios involve high risk, so you should avoid this if possible (1).

What If 9 Equity Release Terms Isn’t Enough?

If you are still confused about any terms you have seen when looking into equity release, please get in touch with us and we will offer a clear explanation. You can do this by phoning us on 0330 058 1579 or filling in a request for a callback here.

Some of our other articles explain these terms within specific contexts which can be more useful.

We recommend that you check out our plans page and our help centre to get a better understanding of equity release schemes and how each one could benefit you.

Another tip is to have a look at our blog, which contains plenty of useful information about the details involved in releasing equity.

Even if you are a number of years away from equity release, you’ll never regret browsing your options now before it’s too late. Please read the various sections of our website to discover the A-Z of how you can eventually earn money from your home’s value.

We are happy to help you make plans for your future, including asking all the important questions for equity release:

• Do I have an existing mortgage?
• How much money could be released from my property?
• Am I prepared to owe more than the value of my house with a home reversion?
• Do I have any outstanding debt?
• Do I have any health conditions?
• Do I want a fixed interest rate or a variable rate that may rise or reduce over time?
• What are the market conditions like currently?
• What is the lender’s eligibility criteria?

References

[1] Understanding Loan-to-Value Ratio (LTV) https://www.experian.com/blogs/ask-experian/what-is-loan-to-value-ratio-and-why-is-it-important/