What is an equity release scheme?

There are two types of equity release: Lifetime Mortgages, and home reversion plans. Homeowners should be sure they have taken the necessary financial and legal advice before deciding that equity release is for them, as the money you receive may affect means-tested benefits and reduce the value of their estate upon death.

Essentially, equity release does what it says. Homeowners use the equity built up in their property to take a cash sum. This is typically in the form of a one-off payment, but there are other options too.

As younger homeowners will usually not have built up enough equity, release schemes are limited to over 55s for lifetime mortgages, with reversion plans exclusively for over 60s.

As well as meeting age criteria, to be eligible for an equity release scheme you must be a UK homeowner with a property worth £70,000 or above. You must also want to release at least £10,000 and the maximum amount you could release will depend largely on your age and property value. Generally, the older you are and the more your property is worth, the more money you can release.

A Lifetime Mortgage is typically the most popular type of equity release; these allow homeowners to borrow a tax-free cash lump sum from the value of their home.

Other options include drawdown equity release schemes, which allow you to release a smaller initial lump sum with the remaining available equity placed into a reserve that you can draw upon at a later date. With one of these schemes, interest is only charged on the money when it is released at the prevailing interest rate at that time. In 2021, three in five new equity release customers opted for a drawdown plan according to the Equity Release Council.*

Under Under the terms of a Lifetime Mortgage, homeowners still own the property and are not required to make monthly repayments. Instead, interest rolls up at a fixed rate and full repayment is only due when the last homeowner has passed away or moved into long-term care.

With most plans you can opt to make voluntary repayments and this is a popular choice for those looking to mitigate the build-up of interest throughout the course of their equity release scheme.

Home reversion plans represent a very small part of the equity release marketplace but are an option available to homeowners aged 60 and above.

Home reversion involves a homeowner selling a part of their home as a percentage figure to a company in return for a lump sum of cash and the right to live in the property. Upon the sale of the property, the homeowner (or the homeowner’s estate) receives another sum based on any percentage of the property still owned. For example, if a homeowner entered a home reversion scheme selling 50% of their property then died five years later and the house was sold, 50% of the home’s sale value would go to their estate.

It is worth noting that setting up an equity release scheme does incur fees. Should you choose to release equity with Reader’s Digest Equity Release, the advice fee will not currently exceed £1,690. Other fees to bear in mind include legal and solicitor fees.

It is widely recommended that homeowners speak to family members, particularly children and grandchildren, when considering equity release. This is a vital conversation because equity release will have an impact on inheritance, irrespective of whether children expect to inherit a home as part of an estate.

When a homeowner with a Lifetime Mortgage dies, the property is typically sold so that loan can be repaid. Any remaining capital then becomes part of the deceased’s estate.

Homeowners are encouraged to take out equity release schemes only from members of the Equity Release Council. Council members offer a no-negative-equity guarantee, ensuring homeowners never owe more than the value of their property and that Lifetime Mortgage debt is not left to an estate to be dealt with following a person’s death.

Whether you're curious as to how much you can release, or you want to take the initial steps towards releasing equity, our handy calculator will give you the informaion you require. You can also contact us on 0800 066 2491 to discuss your needs with a view to arranging a no-obligation face-to-face home visit with one of our financial advisers who can explain the different equity release schemes that could suit your individual needs.

* Equity Release Council Q4 and FY 2021 Market Statistics

Reader's Digest  Equity Release is a trading style of Responsible Life Limited. Responsible Life Limited is authorised and regulated by the Financial Conduct Authority and is entered on the Financial Services Register (https://register.fca.org.uk) under reference 610205. 

Responsible Life Limited receives a marketing contribution from one of the lenders on our panel, Responsible Lending. Responsible Lending is a partner organisation of Responsible Life and may directly benefit from this promotion.

There is no obligation on Reader's Digest Equity Release or Responsible Life to recommend Reponsible Lending products and you will be provided with an impartial advice sservice. Any conflict of interest therein is managed by Responsible Life and overseen by our Compliance Officer. For further details on the value of this contribution please contact us at compliance@responsible.co.uk.

A Lifetime Mortgage will impact the value of your estate and could affect your entitlement to means-tested benefits. Think carefully before securing other debts against your home. To understand the features and risks ask for a personalised illustration.

Only if you choose to proceed and your case completes will Responsible Life Limited charge an advice fee, currently not exceeding £1,690. Our adviser will talk through the setting up costs of a Lifetime Mortgage before you make any decision to proceed.

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