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Equity release schemes help people to earn income through the value of their home.
Many people over the age of 55 are struggling financially yet their house retains a large amount of value that they would like to benefit from while they are alive, rather than saving it all to pass on as inheritance.
When you sign up to one of these schemes, you are agreeing to borrow money from a provider that will be paid back when you pass away through the sale of your property.
Depending on the scheme you go with, some of the proceeds could go to your family, or all of it could go to the equity release product provider.
There is no obligation to start repaying the loan, though if you do not, the interest will accumulate and be added to the total sum that you have lent from the provider.
Certain factors determine whether you are a suitable candidate for equity schemes, and these include the value of your home (it must be over £70,000), the area you live in, and your age (you need to be at least 55 years old for lifetime mortgage plans, and 65 years old for home reversions).
There are two kinds of equity release plan, and these are lifetime mortgages and home reversion. On this page, you can also find information about other potential plans, such as retirement mortgages.
With a traditional mortgage, you would pay it off in consistent instalments until you didn’t owe any more. On the other hand, if you have a lifetime mortgage, no payment has to be made until you pass away and your house is sold.
You are sometimes able to choose to pay some of the interest throughout your life, but this depends on the policy of the scheme you select.
This type of mortgage is not something you can commit to without carefully considering your options. This is because switching schemes is extremely expensive, and early repayments can lead to harsh financial penalties.
Taking out an equity release with a lump sum plan is one of the most common ways to gain value from your house while still living in it. With this method, you will receive all of the tax-free cash at once rather than withdrawing it over time.
Setting up an equity release with this plan is beneficial for people who need the cash as soon as possible, perhaps for a family holiday or home renovations.
It is also popular for its low-interest rates. Finally, as no monthly payments are involved, users of this scheme do not have to worry about the regular burden of payment.
On the other hand, there are significant fees involved if you decide to pull out of this scheme early, so it is not something to jump into spontaneously.
What’s more, you will not be receiving a steady, consistent income, so it is only advisable to have a lump sum plan if you need the money for a large project.
Another common type of lifetime mortgage is a drawdown plan. This does involve cash release as a lump sum, but instead of receiving all of the cash, you will withdraw part of it and then continue to withdraw the rest when you need it.
This is a successful plan as it means your money is easily accessible so you can withdraw it when you need it most, such as when the cost of bills has increased.
It also means you lend only what you need, and as interest is only applied to the money you withdraw, this will mean you are paying less interest overall.
However, the average rate of interest does tend to be higher in drawdown plans than in other forms of equity release.
With this plan, you will pay off the interest on a monthly basis rather than the interest building over time and being added to the cost of the loan when you die or move into long-term care.
You can choose to either pay off all of the interest each month, which will keep the debt low, or pay part of it off each month, which will mean the debt slowly increases.
Interest-only plans are great for people who are worried about having a low credit score, as there are no affordability or income checks involved. They are also helpful for people who cannot afford to pay a traditional mortgage but do have the means to pay monthly amounts.
Yet, if you are currently claiming benefits, you should check whether this plan would affect your state income, as it can declare you an unsuitable recipient of means-tested state benefits.
The idea behind enhanced or ill-health plans is that they provide extra aid for people who are struggling with their health, such as lower interest rates and the potential to borrow more money.
If you have health problems, this option could be great for you as you only need to fill out a questionnaire and you are usually not expected to have a medical examination.
You could also use the loan to pay for something that could help you with your disability, such as accessible home modifications.
However, sometimes a doctor’s report is required for you to receive an enhanced life plan, so do keep this in mind as it can be stressful and time-consuming. Furthermore, you may be at risk of losing state benefits if you opt for this type of plan.
With this loan, you pay back the money when you are in a position to do so, rather than through regular payments. This means that you will pay much less interest over the course of the scheme.
The most obvious advantage of this is that you have plenty of flexibility when it comes to paying back the cash. Instead of waiting until you pass away or move into long-term care for the loan to be paid back, you can do this as and when you want to.
For example, if you are in a particularly good financial position one month, you could pay off a large chunk, and another month you could pay back less.
It must be noted that the voluntary repayment plan is not quite as flexible as it may first appear.
There are certain limitations to repaying the loan, such as you cannot always begin to repay the loan immediately (this can take up to a year), you may have a cap on the amount you can pay back each year, and you may be prohibited from paying back the loan in full until a particular date.
With income plans, lifetime mortgage lenders make monthly payments into your bank account, so you will receive a fixed income each month. This is an excellent way to top up your income in retirement.
If you already earn a regular income and would like to be earning more, you could use an income plan provided that you don’t need access to a large amount of money immediately.
However, this type of plan is very new, which means it is not as widely available as other equity release plans, so you may struggle to find a plan like this.
If you want to rent out a property but you cannot afford to do this the traditional way, a buy-to-let plan may be ideal for you.
You borrow a lump sum of cash, or alternatively, you can withdraw small amounts, to help you pay for a property that you will eventually earn income from.
With buy-to-let plans, there is a fixed interest rate, so you do not have to worry about this rising over time and creating financial issues. Another benefit is that there are no affordability tests, so you do not have to be receiving a healthy income to apply for this.
However, some people have to downsize to be able to take part in this scheme, so if this is something you are not prepared to do, another plan may be better suited to you.
With this plan, you get equity release in order to purchase either a holiday home or a second home.
For many people, this is a great option as they can buy the kind of property they have wanted to own for years, but could never afford to purchase. The property you buy with the equity release money can be anywhere in the world, so you have plenty of flexibility.
However, this is not something that would be ideal for anyone who is hoping to leave a large inheritance to their family, as downsizing is a more affordable option.
Yes, there are other schemes that you can opt for as opposed to deciding to take out a lifetime mortgage. There are unique benefits and disadvantages of equity release dpeending on which scheme you select.
Home reversion is one of the most popular equity release options. If the value of your property is at least £70,000, you are eligible for this method. An equity release provider will purchase a share of your home and will benefit from this when your property is sold after your death.
With home reversion, you must be aware that the loan you receive is less than your house’s market value, but it will allow you to live in your house rent-free and to receive either a lump sum or partial payments from the provider for the rest of your life.
A significant advantage of this plan is that you can protect the inheritance you want to leave to your loved ones, so it is ideal for people who have assets that they would like to pass on to their family or friends.
However, it is essential to note that inheritance will be affected, as the provider will receive some of the funds of the sale of your property when you pass away, so your family will receive less than they would if you had not opted for a home reversion.
Retirement mortgages are loans that begin either before you commence retirement, or while you are retired.
For people who need money at the time of their retirement, this is a great option. It can be reassuring to know that you can plan ahead for your retirement and ensure you are not in a financial dilemma as you can trust that the loan will be implemented at an ideal time for you.
One reason to avoid a retirement mortgage would be if you are able to move to a smaller house, as this is likely to be less expensive and involve fewer risks.
This is a style of retirement mortgage that requires the homeowner to pay the interest on a monthly basis, instead of choosing to let the interest roll-up and be added to the overall debt.
The owner may end up paying less interest through a retirement interest-only mortgage, which means it may be a wise decision financially.
To remind you of the criteria you need to meet as someone who wants to be part of the equity release market, you must own your own home in the UK and this home must be worth at least £70,000, and you must be 55 and over to release equity through the different plans.
Sometimes, your credit rating will be considered when you are filling out the application.
However, it is possible to find a scheme that does not put any weight on your credit rating, and this is beneficial for people who have struggled with credit in the past and would like a fresh start.
There are various ways you can get in touch with an adviser to find out everything you need to know about equity and to discover whether you qualify for equity release.
It is vital that you understand the features and risks of an equity release before you discover whether you may be able to get a lifetime mortgage or a home reversion.
Certain charities, such as StepChange, offer an equity release service that provides you with free advice about this way of earning income. This is a great way to learn about the different types of equity release without committing yourself to a life-changing decision.
Alternatively, you might consider going to a firm to receive counsel. There is security for your equity release when you do this, as firms are obliged to help you with your decision, and if they are a member of the Equity Release Council (ERC), they are carefully regulated.
This means they are not allowed to offer you a negative equity guarantee. As a result, you could find yourself in a tricky position where you owe more than the value you initially lent from the provider, which is likely to happen if your property decreases in value.
Make sure you check the FCA status of the firm you go to, as if they are not a member, they are not regulated by the financial conduct.
This means their standards may be lower when it comes to providing you with advice and helping you arrange a way of releasing equity.
Furthermore, if you are not happy with the service, you may struggle to make a formal complaint if they do not have a policy for this.
Finally, you could find a fully qualified independent financial adviser who will help you consider your individual situation and decide whether lifetime mortgages and home reversion plans are right for you.
They will ask you questions relating to the value of your estate, any means-tested benefits you may be receiving, the ownership of your home, and whether you currently have an existing mortgage.
We recommend that you ask for a personalised illustration to show you exactly how you could release equity from your home, and rely on continuing security for your equity.
If you are unsure where to start with home reversion plans and lifetime mortgages, the best place to begin is by having a look at our website and learning about the benefits and drawbacks of different schemes.
The truth is that no scheme is perfect for everyone, so make sure you understand the different options and decide what would benefit you the most.
Some things you should consider are: Am I intending to leave any inheritance to anyone?
Am I happy to continue living in the property I own as a permanent resident for the rest of my life? Am I prepared to pay early repayment charges if I decide to back out of the scheme?
Do I know whether I would be prepared to pay interest back gradually, or whether I would prefer for the amount of interest to be added to the loan I already owe?
We encourage you to contact us today about how to use equity release, whether you are determined to take this route or you still have many reservations. When you call us on 0330 058 1579, you are not agreeing to a lifelong scheme.
You are simply demonstrating that you are open to hearing more about the positive and negative aspects of these various schemes.
We can make a note of your individual circumstances, provide you with an accurate quote, and point you in the right direction if you decide you are ready to earn an income from your property.
If you are already well-informed on how equity release may help you, give us a call to discuss your plans and we can talk about the specifics of earning money from your home.
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Learn MoreThere are two kinds of equity release plan, and these are lifetime mortgages and home reversion.
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