Equity release mortgages explained - expert advice for homeowners

For most people, your home is your most valuable asset. It can seem like a goldmine, if you’re living in a house you bought 30 to 40 years ago. So, equity release mortgages can be useful. We currently have the best mortgage rates in years so maybe this is the right time to release equity in your home.

Back in the early eighties, average property prices were around £20,000, compared with over £250,000 today, according to financial services company Sun Life. So, as you get older you may find you’re property rich, but cash poor.

Equity release mortgages explained

Equity release is a way to release some of the equity that’s built up in your home. You can have this as a tax free lump sum to spend however you like. It could be for a holiday, home improvement, or helping the grandchildren with a deposit for their first home. These are all common reasons many people look into the option of an equity release mortgage.

You do this by taking a loan, known as a lifetime mortgage, or selling a share of your property, with a home reversion plan.

Both options work in very different ways and come with their own risks. They are both regulated by the Financial Conduct Authority – the financial services industry regulator.

Typically available for homeowners age 55 and over, providers include big names like Aviva, Legal & General, LV=, OneFamily and Canada Life as well as Just, One Life and Pure.

Lifetime mortgages

This is the most popular equity release mortgage option. A lifetime mortgage is a specialist mortgage product. It does not have to be repaid until your home is sold, possibly after your death, or when you go into long-term care.

In the meantime, you can decide whether to make monthly interest payments or stay completely payment free. The original amount borrowed, plus any interest, is eventually paid from the sale of your property.

Lifetime mortgages come with different features. One option that works well for many homeowners is a drawdown facility. This allows you to dip into allocated funds, rather like a bank account, rather than taking the whole loan upfront. What's the advantage? Interest only accrues on the amount you take, instead of on a big lump sum.

How much equity can be released?

How much you can borrow depends on your age, health and property value. The maximum amount is usually up to 60% of the value of your property. In most cases, your home must be worth at least £70,000 and in good condition.

Interest rates are fixed for life, providing you use members of the Equity Release Council. Interest currently averages around 4%. This is much higher than the fixed or discounted deals available with mainstream mortgage lending. Although it's worth noting that 4% is on a par with most lenders’ standard variable rates.

What is a home reversion plan?

In a home reversion plan, you sell a share of your property but retain the right to stay living there. These plans account for just 1% of the equity release market and are usually only available for the over 65s.

By selling part of your property, you get a tax free lump sum or regular income. But, you may only get 25-60% of the market value on the portion you sell. When your home is eventually sold, the equity release company takes their cut. That amount is usually a pre-determined percentage of the property you sold.

Charges and fees

'There are three types of fees you need to be mindful of with equity release,' says Mark Gregory, founder and CEO of Equity Release Supermarket, an equity release advisory service.

'Firstly, there are lender’s fees which can include application and valuation fees. Although, many lenders waive both these costs. Secondly there’s solicitor’s fees, as you must have independent legal advice.'

Fees can vary depending on your solicitor. As a rough guide, you should budget around £700 plus VAT for these.

'Lastly there’s a fee for financial advice. This is a requirement of taking equity release and costs can vary widely.' Some firms have fixed fees, while others charge a percentage of the amount released.

Do Equity release mortgages affect inheritance?

The big issue with equity release is how it affects any inheritance you’re planning to leave.

With a lifetime mortgage, the debt will quickly rack up, as interest is compounded. This means interest is added to the amount borrowed in year one; you then pay interest on this larger amount in year two and so on in subsequent years.

As a rough guide, borrowing £50,000 from your property over 10 years, on the current average interest rate of 4.26% (without making capital or interest payments), will incur £25,883 in interest charges, according to the Equity Release Council. And it will take 17 years for a loan to double in size.

It’s important to discuss the subject of equity release mortgages with your family, so everyone understands the situation. It may well be that your children will prefer to receive a smaller inheritance if doing so enables you to live comfortably. Communication is crucial.

'Equity release can lead to family disputes after people die,' warns Martyn James, a consumer expert with independent complaints resolution service Resolver. 'While it’s your money, if you’re going to do it, explain your decision to the people who are going to inherit.'

The bottom line is that equity release can offer the chance to enjoy a comfortables retirement, or pay off debts or loans with disposable cash. But it's important to consider other ways to achieve those goals before making a final decision.

Can an Equity Release Mortgages be repaid early?

'Over 68% of equity release products allow voluntary capital repayments, typically up to 10% of the original loan each year, with no early repayment charge, says Jim Boyd, CEO of the Equity Release Council. This is useful if you find yourself in a position to pay off some of the advance – because you inherit money, for example.

Higher amounts will attract charges, usually on a sliding scale, depending on how long you have the products. Check the terms to see what providers allow. Saga has a ‘money back guarantee’ lifetime mortgage, which gives customers six months to change their mind and repay the balance in full.

Seeking specialist advice

'People can only take out an equity release product via a qualified and regulated financial adviser, says Jim Boyd. 'Expert advice is essential to weigh up the benefits, costs, the impact on tax, benefits and inheritance, and possible alternatives to equity release.'

Members of the Equity Release Council have a ‘no negative equity’ guarantee. This means you’ll never owe more than the value of your home, plus you’re guaranteed independent legal advice. All members are authorised and regulated by the Financial Conduct Authority.

Bear in mind any government benefits before applying for equity release mortgages. Having a pile of cash will affect your entitlement, especially with Pension Credit or Universal Credit.