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What is equity release?

Equity release is in fact a term used across the whole finance industry, which refers to raising money in the form of a finance facility, secured against the available equity in one or more properties.

It is however, most commonly used these days, with reference to Lifetime Mortgages and Home Reversion Plans.

Both lifetime mortgages and home reversion plans are finance options available to applicants aged 55 years and older (often over 65 for home reversion plans), to make use of the equity in their homes to provide lump sum cash or regular cash releases.

Here at KIS Finance we provide Lifetime mortgage facilities and search all lenders to ensure that we provide the most competitive options available. We do not provide Home Reversion Plans.

What is property equity?

The equity in your property is the market value of your house or flat less any mortgages or other loans or finance that are secured against it.

For example

If your property has a value of £500,000 and there are no mortgages or other finance secured against it, then the equity is £500,000. 0% equity used – 100% available

Alternatively, if there is a mortgage secured against this property with a redemption balance of £200,000, then the equity is £300,000. 40% equity used – 60% still available

Then if there was a secured loan with a redemption balance of £50,000 in addition to the mortgage, then the equity is £250,000 – 40% + 10% = 50% equity used – 50% still available

House value £400k – No mortgages or loans – Equity £400,000

House value £400k – A £200k mortgage – Equity £200k

House value £400k – A £200k mortgage and a £50k secured loan (Total = £250k) – Equity £150k

Equity Release MythBusters - answering your concerns

Is equity release a safe option?

Equity release products and providers are regulated by the Financial Conduct Authority (FCA) so that you can be assured of the professional conduct of the lenders we recommend.

For equity release facilities, we only work with lenders who are members of the Equity Release Council. This is a trade body whose members sign up to a strict code of conduct. They put appropriate safeguards in place such as a ‘no negative equity’ guarantee, which means you will never owe more than your house is worth. 

Why did equity release use to have a bad reputation?

In previous years the only equity release products available were home reversion plans.  With many of these a finance provider would actually purchase the whole value of your property meaning that you would no longer own the property.  When they sold it after you passed away, or went into care, they would keep all the profits and leave nothing for your estate to pass onto your beneficiaries.

However, the vast majority of the market is now based on the model known as a Lifetime Mortgage.  With these plans you continue to own your own home and are borrowing money secured against it.  In this way it is more like a traditional mortgage but with the advantage that it’s more flexible and you can choose not to make payments during the term of the loan.

Will I still own my home?

If you take out a lifetime mortgage equity release plan you will still own your home.  The plan is secured against your property, but it still belongs to you and will remain in your name.

Under a home reversion plan, ownership transfers to the lender. Here at KIS Finance we only arrange equity release using lifetime mortgage plans.

However, under both types of plan you still retain the right to live in your home for the rest of your life due to the ‘lifetime tenancy agreement’ that forms part of the agreement.

Can I move home?

You can still move home with a lifetime mortgage, as these equity release plans are transferable from one property to another. You will however need to check with the lender that the new property meets their lending criteria.

Will I still be able to leave an inheritance?

Taking out an equity release mortgage won’t stop you from leaving your family an inheritance. 
You could choose to use some of the money released to give to your family early, which may be more helpful than having to wait for their inheritance.  It could also mean that any inheritance tax due when you pass away is reduced.

If the value of your property goes up during the time that you have the loan your beneficiaries will benefit from any additional profits when the house is sold.  The lender will take back the loan amount plus any interest due, but the remainder will go to your estate.

You can also take out a plan with an ‘inheritance guarantee’ which enables you to protect a certain percentage of the property’s value.  This will then go to your beneficiaries, regardless of how much is owed to the lender when you pass away.

What if I still have a mortgage

You can take out an equity release facility even if you still have a mortgage.  You will just need to pay this off from the money released or from other funds that you may have available.  After that you are free to use the remaining money released for whatever you want.

Could I end up owing more than my house is worth?

Equity release schemes come with a ‘no negative equity guarantee’ which means that you will never owe more than your house is worth when it is sold.  Any amount still outstanding on the loan will be written off by the lender and neither you nor your beneficiaries will be liable for any shortfall.

Will I have to make expensive monthly payments?

You can choose a plan with repayments to keep the overall cost down, but most plans don’t require any monthly repayments.  The interest is simply rolled up each month and paid to the lender at the end of the loan when the principle capital sum is also repaid, out of the proceeds of selling the house.

If you do decide to take out a plan with repayments these can be voluntary, and optional interest only payments.

Types of equity release

There are two different forms of equity release schemes:

  1. Lifetime Mortgages
  2. Home Reversion Plans.

Lifetime Mortgages

All forms of equity release, other than home reversion plans, are referred to as lifetime mortgages and these are the most popular types of equity release schemes.

A lifetime mortgage enables you to borrow money against the value of your property at a fixed rate of interest.  The interest is added to the loan amount on a monthly or annual basis.  You can choose to make monthly interest repayments to prevent the interest from accumulating but many people choose not to make payments.

Unlike a home reversion plan, under a lifetime mortgage you remain the owner of your property and can continue to live there for the rest of your life. The loan is then repaid either when the homeowner moves into long term care or from the estate when the last homeowner passes away.  Any remaining proceeds from the sale of the property are returned to the estate for distribution in accordance with the policy holder’s will.

With a lifetime mortgage you can choose how you receive the payment, either as a lump sum or in regular instalments.

Lifetime Plan (lump sum)

With a lifetime plan you will receive a one off tax-free lump sum payment for the whole loan amount.  This option is the simplest one if you want a one-time cash payment for something specific.
You will have two choices with a lifetime plan: interest only or roll-up.

With an interest only plan you can repay the interest on a monthly basis, usually by direct debit, to prevent the interest from accumulating.  That way only the capital will be repayable at the end of the term.

With a roll-up plan the interest is added to the capital amount over the term of the loan.  This may be done on a monthly or an annual basis depending on the lender.  There are no monthly payments and the whole amount of the loan, plus the interest accrued, will be repayable when the property is eventually sold, or if the borrower decides to redeem the loan beforehand.

Drawdown Plan

A drawdown plan gives you the flexibility to take an initial tax-free cash lump sum, and then draw down the remainder of the loan in instalments when you want it.

The remainder of the loan will be held in an interest free cash reserve facility until you need it and you won’t be charged any fees to make further withdrawals.  You will only be charged interest on the amount withdrawn, so if you don’t need all the money at once a drawdown plan could save you large amounts of interest over the term of the loan.

Voluntary Repayment Plans

With both lump sum and drawdown plans you can choose to make voluntary repayments under a voluntary repayment plan.  The interest will be charged in accordance with the terms of the type of scheme that you have chosen, but in addition you can make voluntary interest payments to avoid the compound interest from building up.  The limit is up to 10% per year of the original sum borrowed and there are three options available:

Full 10% - this involves paying the maximum 10% of the initial loan amount each year.  If this continues over a number of years the full loan amount could be repaid.

Interest only – this involves paying off the interest element of the loan either monthly or annually, depending on the terms of the loan.  This will then leave only the original capital amount to be repaid at the end of the term.

Random repayments – this allows you to repay amounts as and when you are able to do so, reducing the amount of interest that will be repayable over the term of the loan.

Optional Repayment Plan

An optional repayment plan gives you the most flexibility.  Like an interest-only plan you can repay interest in monthly instalments to prevent it from building up, but you can choose to stop making payments at any time if you need to.

Advantages of a lifetime mortgage

  • You can release funds whilst allowing you to continue to live in your own home.
  • You can use the money for any purpose, such as home improvements, paying off debts or giving you additional retirement income.
  • You can choose not to make any monthly payments so the only costs you will incur are set up costs.
  • Fixed rate interest means that you will have the peace of mind of knowing exactly what the payments will be at the end of the term.
  • You will benefit from any increase in the value of your property.
  • Most lenders offer a ‘no negative equity guarantee’ which means that even if the value of your property were to fall and there was not enough to clear the loan at the end of the term, the lender would write this off.

Disadvantages of a lifetime mortgage

  • Due to compound interest the amount that you owe at the end of the term could be over double the amount originally borrowed, depending on how long the facility runs for and the interest rate.
  • If you are not on a scheme that allows monthly or voluntary repayments there could be an early redemption charge if you want to repay the loan early.
  • The amount you can leave to your beneficiaries will be reduced, as in most cases the loan will be repaid on the sale of your property, which will take that money from your estate.
  • You have to be over 55 to take out a lifetime mortgage.
  • Your eligibility to receive state benefits may be affected.

Home Reversion

Under a home reversion plan the lender buys either a percentage of, or all of your property, meaning you either co-own the property or that the lender owns it in its entirety.

The lender won’t charge you interest and will provide you with a lifetime tenancy agreement, meaning that you can remain living in the property, rent free, for the rest of your life.

Once you pass away or move into long term care the lender will sell the property.  As they will have to wait until this time to recoup their money, the sum you receive for your proportion of the property will be reduced from the market value.

You can take the loan either in one tax-free lump sum or in instalments to help boost your retirement income.

Most home reversion plans will have an older qualify age than lifetime mortgages, often set at around 65 years old.

Advantages of Home Reversion

  • You can choose what percentage of your property you sell.  You can therefore retain a percentage of the value of your property to pass onto your beneficiaries.
  • There is no interest payable so the amount of the loan repayable will remain the same over the term.
  • You can raise more funds on a home reversion plan than on a lifetime mortgage – potentially up to 100% of the value of the property.
  • If the value of the property increases you will still benefit from this in relation to the percentage of the property that you still own.
  • You can borrow more, the older you are.

Disadvantages of Home Reversion

  • You won’t own your entire house anymore.
  • Only homeowners with no mortgage can quality for a home reversion plan.
  • If you sell all of your property to the lender you won’t have anything to leave to your beneficiaries.
  • If your house increases in value, you will not benefit from this for the proportion of the property that the lender owns.

At KIS Finance we do not provide Home Reversion Plans

Illustration of interest rate costs over time with compound interest

The tables below illustrate how much the interest rate will affect the total amount you will need to repay.  The examples compare the repayments over a period of five, ten and fifteen years with example compound interest rates of 3%, 4%, 5% and 6%.

Based on an annually rolled up lifetime mortgage loan of £50,000 with a compound interest rate of 3%

Year Loan Interest at 3% Total Owed
1 £50,000 £1,500 £51,500
2 £51,500  £1,545 £53,045
3 £53,045 £1,591 £54,636
4 £54,636 £1,639 £56,275
5 £56,275 £1,688 £57,963
10 £57,963 £1,739 £59,702
15 £59,702 £1,791 £61,493

Based on an annually rolled up lifetime mortgage loan of £50,000 with a compound interest rate of 4%.

Year Loan Interest at 4% Total Owed
1 £50,000 £2,000 £52,000
2 £52,000 £2,080 £54,080
3 £54,080 £2,163 £56,243
4 £56,243 £2,250 £58,493
5 £58,493 £2,340 £60,833
10 £71,166 £2,847 £74,013
15 £89,830 £3,593 £93,423

Based on an annually rolled up lifetime mortgage loan of £50,000 with a compound interest rate of 5%.

Year Loan Interest at 5% Total Owed
1 £50,000 £2,500 £52,500
2 £52,500 £2,625 £55,125
3 £55,125 £2,756 £57,881
4 £57,881 £2,894 £60,775
5 £60,775 £3,039 £63,814
10 £77,640 £3,882 £81,522
15 £99,091 £4,955 £104,046

Based on an annually rolled up lifetime mortgage loan of £50,000 with a compound interest rate of 6%

Year Loan Interest at 6% Total Owed
1 £50,000 £3,000 £53,000
2 £53,000 £3,180 £56,180
3 £56,180 £3,371 £59,551
4 £59,551 £3,573 £63,124
5 £63,124 £3,787 £66,911
10 £84,475 £5,069 £89,544
15 £113,048 £6,783 £119,831