What is equity release and is it right for me?

It’s common knowledge that we’re all living longer these days. Not only are we living longer lives but also healthier, more active lives as well. Undoubtedly that is a good thing but it is not without some downsides. One of them is the retired older couple who own their own home, the mortgage long paid off and whose children have grown up and fled the nest. They have plenty of life left to live but often lack sufficient income to finance it. They are asset-rich but cash-poor. However, one possible solution to this problem is equity release.

What is equity release?

The value of your home is known as the ‘equity’. To calculate the equity, simply take the current market value of the property and deduct from it any remaining unpaid mortgage. The remaining sum is your equity. So, say your home is valued at £500,000 and the outstanding mortgage comes to £120,000. Your equity is £380,000. If the mortgage has been paid off entirely, then the whole £500,000 is yours.

But the problem with home equity is that it is illiquid, i.e., you can’t buy stuff with it. It won’t pay for that Mediterranean cruise or a new set of golf clubs. One possible solution to that problem is to release that equity in the form of ready cash to spend as you please by taking out a loan against the equity.

Lifetime mortgages

There are two popular methods of equity release and this is one of them. It’s really just a mortgage but, instead of having an express term of say 15 or 20 years, it is open-ended. It only has to be repaid when the borrower dies or moves permanently into long-term care. Typically, the borrower will be offered between 18-50% of the market value of the property and, the older the borrower, the more equity can be released.

Like all mortgages, indeed all loans, interest is payable but the borrower has the option of ‘rolling up’ the interest so that it is added onto the final redemption sum. But there is a big downside to this approach in that the equity release interest rates are compounded and so rolling them up can double the amount of the debt every 15 years.

The other risk is that the total amount of debt repayable actually exceeds the value of the property when it is finally sold, leaving the borrower (or his or her estate) with residual debt still to pay. There are a few equity release horror stories as a result. This risk can be mitigated if the borrower opts to make interest payments on the mortgage, or at least partial payments. Additionally, some lifetime mortgage providers are now offering ‘no-negative-equity-guarantees’ which ensure that the debt never exceeds the value of the property.

Home reversion schemes

This is the other popular method. Instead of borrowing money, the property owner actually sells the property, or a proportion of it, to the company and, in return, they get a right to go on living in the home until he or she dies or moves permanently into long-term care. In the case of a married couple, this applies to the survivor.

Under a home reversion plan, the owner does not receive full market for the property but can choose to take the money either as a lump sum or as regular income. The amount the homeowner gets varies from case to case but, generally, the older they are and poorer their health, the larger the sum. Such are the morbid realities of equity release.

Pitfalls

Common to both lifetime mortgage and home reversion schemes is the risk that, when the borrower/homeowner dies, there will be nothing, or very little, left to bequeath to children or grandchildren. Anyone who has children should, therefore, discuss this with them.

The other problem revolves around the fact that no one knows how long we will live or what state of our health will be in as age and decrepitude loom. Money tends to grow much faster when it is invested in land than when it is represented by cash in the bank. Someone who has taken either a lifetime mortgage or a home reversion scheme, say, in their 60s, may find by their 80s that the cash has run out and they have nothing left to pay for nursing or health care or emergencies.

If the homeowner is in receipt of any state benefits, then taking out a lifetime mortgage or home reversion scheme can impact them or lead to them being withdrawn altogether.

Moreover, there are significant costs involved in setting up either of these plans, including legal fees, valuation fees and arrangement fees. They vary, of course, but the rule of thumb is to budget around £3,000 for them all.

Is equity release right for me?

As with so many things, the answer to this depends upon your circumstances. The costs and risks involved are significant, so equity release should only really be considered if there are no alternative routes available.

If you do not have sufficient cash resources or income to meet your needs, cannot sell your home and buy a smaller cheaper one and you have no dependents or, you do, but they don’t mind if they inherit nothing, then certainly explore equity release.

But, whatever you do and whatever your circumstances, do not commit to anything until you have taken advice from an experienced solicitor who will help you to analyse your situation and come up with the most appropriate way forward.

For further information and trusted legal advice regarding equity release, get in touch with us at Carlsons Solicitors.