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WHAT IS EQUITY RELEASE

Equity release is a way of converting the locked in value of your home into cash, which is available now, without having to move home. It is used mostly by older homeowners who have either paid off their mortgage altogether or have only a small amount left to pay.

You can release all or part of the value of your home to give yourself a lump sum or regular income (or both). This guide gives some basic information about equity release and tries to answer some of the questions you should ask yourself if you are considering this option. However this is not a full guide as we are unable to provide specific details without gathering certain information about yourself. So if you require more information please contact us.

How can I release the equity in my property?

There are two main and distinctly different methods of releasing equity

Method 1 – Taking out a lifetime mortgage (also known as a reverse mortgage in
Australia, New Zealand and the U.S.A.)

There are special types of loans, usually designed to run for the rest of your life called lifetime mortgages. You borrow money secured against the value of your home to give you a lump sum or regular income. The loan is repaid to the lender when your property is sold. You continue to own your home.

Method 2 – Selling you home (or a proportion of it)

This is normally called a reversion or part reversion plan. You sell your home, or a proportion of it, to a reversion company and you (and your partner If applicable) continue to live in it without charge until the arrangement ends. After the arrangement ends, the reversion company receives the full value of the proportion of the property you have sold, and if applicable your estate receives the full market value of the proportion of the property you have retained ownership of.

Method 1 – Taking out a lifetime mortgage explained

There are two types of lifetime mortgage. The Financial Services Authority regulates both of these arrangements.

Type A. Rolled-up interest mortgage.

The lender gives you a lump sum, a series of lump sums or a monthly income (or both), based on the value of your home. Nothing is repaid until the arrangement ends or the property is sold. Interest is added to the amount you have borrowed each year. This is “rolled up” over the life of the loan.

How much you can borrow depends on how much your home is worth and on your age. The older you are, the greater percentage of your home’s value you can borrow. You need to check whether the rate of interest you will pay is fixed. It could also be capped, which means it cannot go above a certain level. Knowing this will ensure that you know the maximum amount of interest added each year and the amount you owe the lender at any time.

Most lenders offer a “no negative equity” guarantee. This means that the amount you owe can never exceed the value of your home. Even if, when the arrangement ends, the amount you borrowed plus interest is more than the value of the property you will not have to repay any more than the amount your home is sold for.

When the arrangement comes to an end, any balance left from the proceeds of the sale of your property belongs to your beneficiaries and any possible future rise in property values can be taken into account when estimating what this amount might be. This is the most popular form of lifetime mortgage.

Type B. Interest only mortgage

You borrow a lump sum secured against the value of your home. You pay interest on the loan each month, the lump sum you originally borrowed is repaid when your home is eventually sold. You need to be able to afford the interest payments out of your pension or other income.

The interest rate may be fixed or variable. If it is variable and your pension or other source of income is fixed you may find it more difficult to meet your repayments if interest rates rise.

One option may be to invest the lump sum you borrow, perhaps in an annuity that gives you a regular income. You use the income to pay the interest on the loan and what is left over is yours to spend. Because annuity rates are low and depend on your age this type of arrangement is really only suitable for very elderly homeowners. This is not the most popular form of lifetime mortgage.

Method 2 – Selling your home (or a proportion of it) explained.

The Financial Services Authority regulates this arrangement.

With a reversion scheme you sell all or a proportion of your property for an agreed amount. You can receive this as a lump sum, an income or both. If you choose to sell all or a part of your property to a reversion company you will receive a percentage of its current market value based on you and your partner’s age.

When the arrangement comes to an end the market value of the proportion of your home that you sold belongs to the reversion company. The balance including any increase in value belongs to your beneficiaries. If you sold your entire home the purchaser owns your home outright including any increase in value. Some schemes offer a rebate to your family if you die within the first few years of signing up to a home reversion scheme.

The company arranging the plan either purchase the equity in your property for their own investment portfolio, or introduce a third party to purchase it. At the same time that the sale is completed, you become a tenant and receive a Lease.

The Lease is normally for 99 years. The rent is usually a peppercorn. In other words, no rent is actually payable. However in some cases it may be for example, £10 per year. This rent is fixed for the entire term of the lease and can never be increased.

If you only sell part of your equity the document used is called a Trust Deed.

These agreements legally guarantee that you (and your partner if applicable) can continue to live in the property for the rest of your life. To ensure you always have this protection, your solicitor will register your Lease or Trust Deed at HM Land Registry.

As you will continue to live in your home rent-free for the rest of your life, or until you decide to move, the payment you receive from the reversion company may or may not, depending on the scheme chosen, reflect your home’s current market value.

Disclaimer: Echelon mortgages Ltd and its trading subsidaries does not give advice on equity release or life time mortgages all enquiries will be referred to our chosen equity release provider The Way Ahead.

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