How Does Equity Release Work?

Equity release is simply a way of borrowing tax-free money that’s tied up in your home or another asset with significant capital value.

Equity release products are typically only available to those aged 55 or over who have built up substantial value in their home.

So, how does releasing equity work in the UK?

There are several ways you can release cash from your home, but the two most common options are through a lifetime mortgage or home reversion plan.

With a lifetime mortgage, you retain ownership and residence of your home while borrowing money (typically up to 60 per cent of the value of your property) against it.

You then have the choice of either repaying all, none, or a certain percentage of the interest on this loan each month.

This loan only needs to be repaid in full when you either pass away or move into long-term care and the funds for this are typically taken from the sale of your estate.

Home reversion, on the other hand, is a less common option which involves selling either part or the entirety of your home (often between 25 and100 per cent) to a home reversion provider.

The money is then repaid in the same way as a lifetime mortgage – by selling the property when you either pass away or move into long-term care.

In return (depending on which product you choose), you’ll receive either a cash lump sum, regular income, or both a lump sum and regular income while still living in the property.

If you choose an equity release product without monthly interest repayments, this amount will be added to your overall loan amount.

For a more detailed answer to ‘how does equity release work’, don’t hesitate to contact the experienced team of solicitors at Wilson Browne Solicitors.

Unsure where to start when it comes to releasing equity from your home?

To help you understand how to release equity from your home and the steps you need to take, the legal experts at Wilson Browne explain the various stages of releasing equity below.

Start looking early

Because releasing equity from your home can take anywhere between four weeks to a couple months, it’s important not to leave it until the last minute.

Contacting a financial and legal advisor should therefore be one of the first things you do when considering releasing equity from your home.

Reach out to a specialist advisor

You first port of call when considering releasing equity from your home should be a specialist equity release advisor.

They can help you to understand the different products, minimise charges, plan for unexpected costs, and protect your estate.

They can also explain complex terms and help you to determine whether equity release is the most appropriate scheme for your personal circumstances.

Seek legal and financial advice

After consulting with a specialist equity release advisor, exploring all your options, and making a decision that you believe is right for you, you’ll need to contact an experienced conveyancer, like Wilson Browne Solicitors.

They can outline the potential legal consequences of opting for your chosen equity release scheme, ensuring you’re well-informed throughout the entire process.

Choose a suitable deal

While there are many different equity release lenders and schemes, the two main options for equity release are home reversion plans and lifetime mortgages.

Alternatively, you can also remortgage and release equity at the same time which involves securing a new, larger mortgage deal than your existing arrangement using the equity in your home as a deposit.

As a result, you’ll still need to make monthly repayments to pay off this loan.

Like any loan, there are some potential downsides that you should be aware of before committing to this arrangement.

Fortunately, however, equity release schemes benefit from significant safeguarding protections and there’s a strict code of conduct they must follow as set out the by the Financial Conduct Authority (FCA) with the oversight of the Equity Release Council (ERC).

For example, you must receive comprehensive financial and legal advice before making your decision about equity release.

This can help to protect your interests by ensuring you’re fully informed about the potential pitfalls on the specific equity release scheme you’ve chosen.

While the exact downsides will naturally vary depending on your chosen equity release scheme, some of the typical areas to consider are listed below.

The value of your estate will decrease

Given you’re borrowing money from your estate when you release equity from your home, this will impact how much your estate is worth.

The amount of money you’ve borrowed through equity release, alongside any interest accrued during this period, must be paid off when you pass typically by selling the property.

As a result, any beneficiaries stipulated in your will to inherit from your estate won’t inherit as much.

You should therefore discuss your plans with beneficiaries to ensure they aren’t faced with any unexpected or unwelcomed surprises about the state of your financial affairs when you pass.

Can be more expensive over time

When it comes to deciding between equity release or downsizing, releasing equity from your existing home can be the more expensive option in the long term due to the higher interest rates.

Often, downsizing to a more affordable property will result in a standard mortgage arrangement with lower interest rates.

Additional charges may apply

Like any loan arrangement, there may be additional unexpected costs to consider when you release equity. Your specialist equity release, financial, or legal advisor should inform you about these costs which can include product fees, early repayment charges (ERCs), and exit fees, for example.

Temptation to borrow more than you need

Through equity release, you can typically borrow up to 60 per cent of the value of your home. This is a considerable amount of money that may be tempting, so you should be careful not to purchase more than necessary. This is because the interest can build up quickly, drastically affecting the value of your estate.

May affect the benefits you’re entitled to

Equity release can have an impact of the means-tested benefits you’re entitled to because you have more cash. This means you should check the impact that releasing equity from your home could have on your benefits such as your pension credit or universal credit.

According to the article, ‘Should you equity-release?’ written by financial journalist and broadcaster, Martin Lewis, and published online by Money Saving Expert, his views on equity release is that these schemes can be expensive and have long-term implications.

As a result, he recommends those considering releasing equity from their home should first explore downsizing. This is because selling your property and moving to a smaller home will often provide you with excess cash that could cover the amount you’d acquire by releasing equity.

However, he does caveat this advice with the potential personal and social impact of being forced to move out of an area you’ve become accustomed to if you can’t afford to purchase a smaller property in the same location.

Moreover, selling a property and buying another also comes with all the expected costs, such as agent fees, removal charges, and stamp duty, if applicable. Having the finances to support downsizing is therefore essential if you want to explore this route of raising cash.

Martin Lewis also outlines some of the various potential pitfalls of releasing equity, including the fact that having cash instead of property can affect the benefits you’re entitled to, and more costly lifetime mortgage deals can have interest rates of up to eight per cent.

He also emphasises the statement that you should seek professional advice before opting for an equity release scheme.

An FCA requirement, seeking guidance from a qualified equity release advisor can help you to compare deals, understand the potential pitfalls of each option, and select the most suitable product for your circumstances.

The most common reason for being turned down for equity release is simply that you or your property doesn’t meet the lender’s criteria for equity release.

For example, most equity release lenders will have a minimum and upper age limit when you apply and a minimum property value.

They may also take into consideration the amount of remaining mortgage you have left on your home as well as how the property is used.

Ultimately, whether or not you meet the lender’s specific criteria will determine whether you’re eligible for their equity release scheme.

Each lender will have their own criteria, so it’s worth shopping around if one lender has already turned you down for equity release.

Still struggling to determine whether equity release is an appropriate avenue for you and your family? Fortunately, you needn’t make this important decision alone.

Instead, the FCA state that you must discuss the plans available to you with an independent financial advisor, regulated by the FCA, to help you decide whether equity release is the right thing for you.

In fact, you must receive both legal and financial advice to determine whether equity release is a suitable route for you to explore as this is something your new lender will insist upon.

Both parties should be well-versed in equity release schemes, allowing them to assist you with understanding every aspect of your chosen equity release lender and product.

A conveyancing professional will explain the legal consequences of proceeding with your chosen plan to ensure you’re fully informed when making your decision.

At Wilson Browne Solicitors, for example, we’ll make sure you have a face-to-face meeting with one of our highly-knowledgeable conveyancers that have experience with numerous equity release schemes in the UK.