Equity Release Basics

[Puglia]

Hi,

I'm an adviser specialising in equity release and occasionally see related questions posted on my Google alerts.

As the market is quiet, I thought it may be helpful to offer some basic guidance, no personalised advice, the information you could find online but all in one thread.

I'm not selling anything and am happy to provide verification of my qualifications and ERC membership to Mumsnet, if required.

Equity release isn't right for everyone, but can be a great solution for some people who don't want to downsize.

Please post any questions and I'll answer as soon as I can.

I work for an ER law firm, similarly if anyone needs advice on the legal side we’d be more than happy to help
ERC registered also with many years experience in the ER sector.

Thanks both- under what circumstances is equity release a good option? Optimum age/ circs?

Isn't equity release an absolute con?

Not necessarily, it depends on the circumstances. Plus, following some early mis-selling scandals, it's not as terrible as it was at the beginning.

You have to balance it against the alternatives, which would either be downsizing or struggling in a cash poor asset rich situation. Or getting a lodger.

It can allow someone to remain in their home and heat/maintain it in a way that they wouldn't be able to afford from income alone. Now whether that's the best solution for someone whose health means they can't manage a larger home is debatable, but if they don't want to move, then equity release can be a solution.

Today's equity release consists predominantly of Lifetime mortgage transactions, because you retain full ownership of your home.

Home Reversion is the other type, but that's a sale of 25-100% of your property for a sum of money and the right to reside for life, but you're still responsible for the upkeep of the property. These schemes are very unpopular, but you do know the percentage of the future property value you will leave for your beneficiaries.

Lifetime mortgage - You can use it to raise capital for a broad range of uses, including purchasing a new home.The lender places a charge on the title, the same as a High Street lender, but they are unique in that the available loan isn't based on your income, but on the age of the youngest borrower (min 55) and the property value. There is no maximum age.

They are popular for three main reasons: no income requirements, no commitment to make any payments, you can release from £10k and have funds available for future expenditure in a drawdown reserve.

You don't pay to have a reserve and only incur interest if and when you draw.

Equity Release Council approved plans come with 5 product standards for the borrower's protection: a fixed rate of interest on drawn funds (or capped, if variable - there are currently no variable rate plans), a no negative equity guarantee so you can never owe more than the value of your home, the right to reside until the last borrower vacates the property, Lifetime mortgages are portable to another property as long as it is with prevailing lending criteria, and lastly you can make voluntary payments up to plan specific annual limits (currently at least 10% p.a.).

With best rates fixed for life at about 6% currently, you can pay not only the annual interest, but also chip away at the capital, as and when you choose.

Releasing equity to hold it as savings can impair your ability to claim means tested benefits, and at a fixed rate of 6% your debt will double in about 12 years if no voluntary payments are made.

Unless your objective is to mitigate IHT, you should try and hold off releasing equity for as long as possible. I would say my average client is in their mid 70's.

Equity release is designed as a long term financial commitment to be repaid on the death or move into permanent care of the last borrower.

The borrower retains full ownership of their property with a Lifetime mortgage, so their executor handles the sale to repay the loan plus any unpaid interest and charges.

Equity release is still sullied by the plans from the 1990's that weren't fit for purpose and led to some unsavoury client outcomes.

Today's Lifetime mortgages are flexible, transparent and heavily regulated. They're a great solution for the right situation.

The best thing to do is speak to an Independent Financial Advisor.
more than happy to put you in touch with someone. they can discuss your needs and help you decide if it’s right for you.

This is aomething weve very breifly looked into.
What happens if you need to go into a nursing home in terms of paying for that care?. Would it be looked at deprecation of assests if you took a lot of equity out of the house ?. Just trying to work out who would take what chunk! For example the interest would be racking up so the amount left to pay for care would deminish?...
Hope that makes sense?

Deprivation of assets is a concern where equity is released and gifted.

It's hard to say it was intentional to avoid care fees if the borrower was well and not receiving care or support at the time, but it is a risk to be considered.

As you say, if you've released equity the amount remaining is reduced and will erode further if no voluntary payments are made.

The safest and most economic thing to do is downsize, but once we become familiar and secure in our homes, the sensible decision is usually overlooked because we have emotional feelings about our property.

Yes that makes sense

@Puglia thanks for that OP, makes total sense. We have a way to go yet before we would need to be making these kind of decisions but we have no kids, or anyone who we would wish to leave any property to etc, so my intention is to get as much back as possible and live a healthy retirement (hopefully!).

Let's say you owned a property worth £200k, and wanted a lifetime mortgage to release £30k, say for a new kitchen, new car and a holiday. At 7% interest how many years would it be till you owed more than your house is worth?

If it's an Equity Release Council-approved Lifetime mortgage, it has a no negative equity guarantee, so you can never owe more than the value of your home as long as you've complied with the lenders T's&C's. The loss is written off by the lender.

For the purpose of the exercise, £30,000 compounded at 7% Annual Equivalent Rate would exceed £200k after approximately 28 years.

Can you use a lifetime mortgage to release equity and then redeem it if you sell up and down size or are there penalties for this?

A Lifetime mortgage is not designed as short term finance, so there are penalties to repay more than 10%, depending on how long you've had the loan.

The lender would expect you to port the mortgage and if they won't lend on the new property, may allow penalty free repayment depending on how long you've had the loan and if Downsizing Protection is included in the plan.

Otherwise, the most competitive products have penalties lasting 15 years, there is one plan with charges lasting 4 years, but a high fixed rate for the flexibility.

A typical penalty is 5% of the loan and any unpaid interest in years 1-5, 3% in years 6-10, nothing thereafter.

Realise this is from couple months ago but I have some questions!

My mum owns her house outright. It’s worth around £240,000 - just from a zoopla estimate not from actual valuation.

She is 55 in two years. The money she got to buy the house was from my Dad’s life insurance, he passed away when I was 4.

I am really struggling myself to save a deposit to buy, as many others are. I’m currently a student nurse and will qualify in 2025, just around the same time my mum turns 55. I plan on saving as much as I can, however have discussed with her the option of taking £20k as equity release as technically the money tied up in that house is my inheritance from my dad.

She has 2 school age children living with her, so downsizing is not suitable unfortunately. I have said that if I took out £20k equity from her house, I am happy if that means I am not entitled to anything further down the line after interest etc. I imagine her being around for another 40 odd years to which I’ll be in my 70s myself and hopefully own my own house outright, to which I will not need or want more.

I have 2 children of my own now and desperately want to get on the property ladder so that I can eventually have my own capital to pass to them.

could you tell me what kind of interest we’d look to pay on a £20k equity release? And I saw one option online that I could pay the interest monthly myself to prevent a chunk being taken eventually. But would that be paid monthly until she passes? Not sure if I want to commit to 40 years of paying the interest on top of my own mortgage? I don’t know how much it would be but if it’s in the hundreds, I doubt I’ll afford it. I’d love to hear whether you think it would be suitable for us. My mum is also receiving means tested benefits atm, so does it mean that would be affected even if she gifted it directly to me?

thank you in advance 🙏🏻

Hi,

There are a number of points to cover, not least the means-tested benefits your mum receives.

If her savings exceed £6k, she is at risk of losing the benefit support. The released equity is paid to a named applicant and you're probably thinking that she could just transfer it straight to you, which is true.

However, if the DWP discover that she had money and gave it away, they could withdraw her support.

Interest rates on Lifetime mortgages (aka the popular type of equity release) are fixed for life and payments are voluntary. If you pay the annual interest in full every year from the start, the loan would remain as originally taken and not increase, so it's a way of protecting your inheritance.

For example, best rates are currently around 6.5%, so that would cost £1,300 a year, or £108.34 per month.

While the ability to make payments up to annual plan-specific penalty-free annual limits is a feature on Equity Release Council approved plans, you'd have to pay that until the last borrower either died or moved into long term care.

However, payments are voluntary and unpaid interest is then added to the loan, eroding the remaining equity the longer it runs.

Ultimately, the loan is designed to be repaid from the property sale proceeds.

General advice is to defer releasing equity for as long as possible, unless the objectives and situation dictate otherwise.

But the main concern is what position your mum would be in if she lost her benefits.

I would look for another way of getting the deposit i.e. another family member.

Probably not the reply you wanted.

Hi OP - any chance you can help with my situation please? I am looking to buy a house next year. I keep renting and now I have 2 children I need to settle down. As my partner can't afford to help, my mum (age 69) who lives on her own in a 650k house wants to help me by taking out c. 500k equity release which would go towards the deposit and remaining house value. I would take out a mortgage of about 300k on my income. She doesn't want to pay any interest while she lives and purely wants to take out the equity release to put towards my new home. She would stay in her home, and then when she dies she plans for the house to be sold which would repay her equity release + the interest as there's still about 150k left in the house to pay back the interest and leave some money to me. Does this sound right?

As your mum is 69, the maximum amount released would be around 40%.

Compound interest is charged yearly and increases the debt very quickly. For example, if £260,000 was released, based upon 6% interest, the amount owed after year 1 would be £275,600. 6% interest is then applied.

Oh no - so that completely changes everything! Is the only option then for my mum to sell her home and put some proceeds to my new home?

Oh no - so that completely changes everything! Is the only option then for my mum to sell her home and put some proceeds to my new home?

That might end up as deprivation of assets if she needs to go into a care home, depending how much she gifts you, I think.

Hello @Puglia thank you for this thread. I wonder if you can shed any light on the situation with my in-laws.
In 2011 when she was around 68 & he 75 they took out equity release on their property I'm not sure of the value at the time but currently it's worth around 6-700k.

It irks me somewhat because they have a large garden and live out in the country which means my husband has to spend his weekends traveling over to them and maintaining said garden because they are now too old to do it. His life would be much easier if they had done the rational thing and downsized 🤬

Anyhow, based on the information I've given can you say what the likely interest rate is on their policy and, being that it was taken out in 2011 is it likely to be a policy which is a good one?
Thank you in advance 🙇🏼‍♀️

Hi,
I would guess that the rate is 6.5%-7.5%, if so, whatever was originally released has more than doubled by now.
Today's lowest rate is around 5.6%.

A policy with Aviva or Just from that time may have a compassionate window for penalty-free repayment by the last borrower if one has died or moved into permanent care.

Many borrowers remortgaged during COVID to fix at lower rates, but hindsight makes us all experts.

Thank you very much@Puglia
In particular having an idea of the interest rate helps us to figure out how much equity is likely to be left, he is very grumpy and tight lipped about it and she hasn't got a clue about how it works 😬

Initial fixed rates are based on the release amount, so if they released a significant percentage, their fixed rate could be higher and erosion of equity faster.

You could offer to make voluntary ad hoc payments to try and mitigate the erosion and protect your wife's inheritance, if it is affordable. The lender will confirm penalty free limits and it is likely to be 10% of the funds received.

Borrowers also receive an annual mortgage statement.

Oh no - so that completely changes everything! Is the only option then for my mum to sell her home and put some proceeds to my new home?

The other option is that you set your sights somewhat more realistically and don't aim for a first time buy of £800k.