What is equity release?

Equity release refers to products that allow you to access money built up in your home in the form of tax-free cash. The amount of equity you can release will depend on a number of factors, including your age and the value of your property.

While equity release can be the right option for some people, there are some pros and cons to be aware of. An equity release product will allow you to free up cash, but it will also reduce the value of your estate, meaning you’ll have less to pass on when you die.

The most common way to release equity is by taking out a lifetime mortgage, but there are other options, as we’ll see below.

How does equity release work?

Your options for releasing equity will depend on the type of product you choose, so it’s important to fully understand the terms and conditions of your equity release plan.

You can take the money you release as a lump sum, as smaller payments over time (also known as a drawdown), or as a combination of both.

Reasons for equity release

When you release equity from your home, you can use the funds for almost anything you choose. Some common examples include:

  • Financing home improvements
  • Paying off an existing mortgage (or other debts)
  • Boosting retirement income
  • Funding private healthcare
  • Helping out family members
  • Travelling

When releasing equity, it's tempting to focus on the immediate boost you will get from the money you unlock. However, it's important to consider how it will affect your future choices and financial situation later in life.

Please note that consolidating debts using equity release could end up costing more in the long-term. Any money that you gift may be subject to inheritance tax.

Equity release options

There are two main types of equity release – lifetime mortgages and home reversion plans.

Lifetime mortgages

A lifetime mortgage is a loan secured against your home that allows you to release money.

With a lifetime mortgage, you don’t usually make repayments while you’re alive. You keep ownership of your home and the loan is repaid when the property is sold after your death, or when you move into long-term care (this will apply to the last borrower, if it’s a joint plan).

If you choose to take out a lifetime mortgage, you can release the money as a lump sum amount or as a series of regular payments.

Home reversion plans

With a home reversion plan, you sell some or all of your property to a home reversion provider. In this scenario, your provider will offer to purchase a percentage of your home (unless you choose to sell the whole property).

While the amount that you will be offered by your home reversion provider will be below market value, you can continue living in your property for the rest of your life – usually rent-free.

In return, you’ll get a lump sum or regular payments based on the market value of your home (or the part you choose to sell). You won’t receive the full market value for the share you’re selling as you don’t pay any interest on the money.

When you (or the last borrower if a joint plan) die or move into permanent long-term care your property will be sold, meaning your estate will be reduced by the proportion of the property’s value that is repaid to the provider.

Who is eligible for equity release?

To be eligible for equity release, you will need to be at least 55 years old.

You must also own a property in the UK, and there will be other minimum requirements to consider. These include, but aren’t limited to:

  • The minimum age you can take out a lifetime mortgage is 55. With a joint application, this will apply to the youngest applicant.
  • The maximum amount you can release depends on your age and the value of your property.
  • The value of your property must be at least £70,000 to qualify for equity release. The property must also be in good condition. If it does not meet the standards required (for example, the property needs essential repairs), your equity release application may be declined.

How much equity can I release from my home?

If you’re eligible for equity release, there are a number of factors that will determine how much money you can take from your home. Some examples include:

  • Property value – As part of the application process, your provider will carry out a professional valuation that will help to inform how much equity you’re able to release.
  • How long you’re likely to live in your home after taking out your plan – This calculation is based on your age and your health. If you make a joint application, the estimate will be based on the details of the youngest applicant.

Your lender will also look at the type of property you live in, as well as it’s condition and location.

Can I release equity from my shared ownership home?

If you co-own your home (with a housing association, for example), you may still be eligible for equity release. But if this is the case, you’ll need to purchase the remaining share of your home as part of the process.

You won’t be able to take out equity release on the share that you own. Equity must be released from the whole property, and you must purchase the remaining share from whoever co-owns the property.

Is equity release a good idea?

Equity release is a big decision. It isn’t right for everyone and will reduce the value of your estate, which is why it’s important to explore all of your options.

Wesleyan Financial Services does not provide advice on equity release. However, you can speak to one of our Specialist Financial Advisers who can review your personal circumstances and explore alternative ways to free up your finances.

At your request, Wesleyan Financial Services can refer you to an expert broker partner who can give information and advice on lifetime mortgages. Wesleyan Financial Services will receive a fee for an introduction to them for a lifetime mortgage when the mortgage completes.

Equity release pros and cons

Advantages of equity release
Disadvantages of equity release
You can get a lump sum of tax-free cash that can be used now, rather than being locked into the value of your home.
Equity release will reduce the value of your estate. This means that the amount you can leave to beneficiaries will be reduced.
You can continue living in your home until you pass away or move into permanent residential care. With a joint plan, this will apply to the last borrower.
If you opt for a home reversion plan, the reversion company will own all or part of your property.
Equity release is transferable, so you’ll have the option to move into a different property in the future (provided that the new property meets your provider’s lending criteria).
If you receive home care that is fully or partly funded by your local council, you may begin to be charged or asked to pay more. You may also no longer qualify for other means-tested benefits.
If you choose a lifetime mortgage, you will keep ownership of your home.
Charges for equity release advice, valuation fees, solicitor fees and administration fees may apply.

Can I release equity if I have a mortgage?

Yes, you may be able to release equity if you have a mortgage or secured loan on your property.

Generally, the cash released will be used to pay off any outstanding mortgage in the first instance, and then any money left over will be paid to you. However, it’s important to remember that repaying an existing mortgage or other debt using equity release could cost more in the long-term.

How much does equity release cost?

The costs associated with equity release will depend on the type of product you choose. There will usually be fees to cover arrangement, valuation, advice and solicitors.

Does equity release reduce inheritance tax?

As equity release reduces the value of your estate, the amount of inheritance tax payable upon your death may be lower. Depending on the size of your estate, you may not meet the threshold at all – provided the released equity is spent and not invested.

While this may sound appealing, it’s important to remember that equity release will also reduce the value of your estate that you’re able to pass onto your beneficiaries when you pass away.

What’s more, unless you pass away within the first few years of taking equity release, the amount of interest charged may be more than the amount that would have had to be paid in inheritance tax. So, it isn’t usually an effective means of inheritance tax planning.

If you gift the funds you release using equity release, and pass away within the first few years, your estate could end up paying the full amount of inheritance tax – plus the interest on the equity release plan.

Please note that the Financial Conduct Authority (FCA) does not regulate inheritance tax planning and trusts.

Things to consider before choosing equity release

While equity release can provide an effective way to support your retirement, it isn’t right for everyone. If you plan to free up funds from your property, here are some alternatives to consider before making a decision.

  • Downsizing – One alternative to equity release is to sell your current home and move into a smaller, cheaper property. In doing so, you’ll be provided with an immediate cash lump sum that can be used to supplement your income. You may be able to save on other bills too, such as maintenance, running costs and Council Tax.
  • Remortgaging – Another way to stay in your home and borrow against its value is by remortgaging. If you already have a mortgage, you may be able to remortgage to either increase the amount you’re borrowing or extend your term. By extending your term, you could reduce your monthly payments. The difference between remortgaging and equity release is that you have to repay a conventional mortgage in your lifetime, rather than when you pass away or move into long-term care.
  • Explore local authority grants – If you’re considering equity release to fund home improvements, it’s worth finding out what your local council can offer. Some local authorities make grants available to those who are looking to update their home so they’re able to continue living there independently.

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