Equity release is when property owners release cash from their property in exchange for later repayment of that debt to the lender, most commonly through a loan that is repaid on the borrower’s death. Normally only available to borrowers over the age of 65 but can be made available to other age groups in exceptional circumstances.
In simple terms it is a secured loan on your property with NO repayments as the loan is paid off when the property is sold or on the death of the mortgagee.
Who is eligible?
The criteria for equity release will largely depend on the lender. However, for lifetime mortgages the lender will likely only lend to elderly people and will require enough equity to cover its proposed lending.
Retirement Interest Only mortgages, were introduced to the market in March 2018, are available to borrowers over the age of 65.
Equity release in the context of a more general property remortgage would likely cap lending at around 85 per cent of the property’s value.
What are the options?
If you qualify then the following equity release options are available:
Lifetime mortgage A loan secured on a property where compound interest is added to the capital throughout the term of the borrowing of the loan. The loan is paid back when the property is sold, the borrower dies, or if the borrower moves out into a care home.
The borrower remains the property’s owner and retains responsibility for its upkeep and maintenance.
Interest only mortgage A loan where the capital is repaid on death and the borrower continues to make payments in respect of the interest only whilst they remain in residence at the property.
Retirement Interest Only Mortgage They are provided to borrowers over the age of 65 and are based upon the income of the borrower and the affordability of the mortgage. They were introduced in March 2018.The borrower only pays the interest payments and the mortgage carries on over the period of the borrower’s life, as opposed to for a set term. The loan is repayable upon death, sale of the property, or when the borrower moves into long term care.
Home reversion plan This is when the borrowers sell all or part of their home to a third party, who becomes the owner of the property. In return the borrower is given either a fixed lump sum of cash, guaranteed monthly payments, or a combination of the two and has the right to remain in occupancy of the property for as long as they wish.
Home income plan/Lifetime mortgage A lifetime mortgage where the capital is used to provide an income by purchasing an annuity (a series of payments which are made at regular intervals). The annuity is often provided by the lender, and this product is predominantly available from insurance companies.
UK equity release schemes Available to borrowers over the age of 55 who are homeowners with enough equity in the property. The borrower can opt to release some of the equity they hold in their property via an equity release arrangement. This loan is usually provided by a specialist lender.
Paying off debts using equity release
A borrower can use the money they receive as the choose to and so if that involves paying off debt then this is allowed.
The borrower needs to be careful when planning to release equity and how the repayments are to be made.
While it is important to repay your debts, releasing your equity in your property, usually in your later years of life when you have limited ability to generate future income, may limit the money available to you to enable you to continue to meet your necessary living expenses.
There are other options available if you have accumulated personal debts such as an Individual Voluntary Arrangement , a debt management plan or even bankruptcy.
It is important to take advice before drawing down on the equity in your property.