Equity release is in fact aterm used across the whole finance industry, which refers to raising money inthe form of a finance facility, secured against the available equity in one ormore properties.
It is however, most commonlyused these days, with reference to Lifetime Mortgages and Home Reversion Plans.
Both lifetime mortgages andhome reversion plans are finance options available to applicants aged 55 yearsand older (often over 65 for home reversion plans), to make use of the equityin their homes to provide lump sum cash or regular cash releases.
Here at KIS Finance we provideLifetime mortgage facilities and search all lenders to ensure that we providethe most competitive options available. We do not provide Home Reversion Plans.
The equity in your property is the market value of yourhouse or flat less any mortgages or other loans or finance that are securedagainst it.
If your property has a value of £500,000 and there are nomortgages or other finance secured against it, then the equity is £500,000. 0% equity used – 100% available
Alternatively, if there is a mortgage secured againstthis 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 redemptionbalance 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 – Nomortgages or loans – Equity £400,000
House value £400k – A £200kmortgage – Equity £200k
House value £400k – A £200kmortgage and a £50k secured loan (Total = £250k) – Equity £150k
Equity release products and providers are regulated by theFinancial Conduct Authority (FCA) so that you can be assured of theprofessional conduct of the lenders we recommend.
For equity release facilities, we only work with lenders whoare members of the Equity Release Council. This is a trade body whose memberssign up to a strict code of conduct. They put appropriate safeguards in placesuch as a ‘no negative equity’ guarantee, which means you will never owe morethan your house is worth.
In previous years the only equity release products availablewere home reversion plans. With many ofthese a finance provider would actually purchase the whole value of yourproperty meaning that you would no longer own the property. When they sold it after you passed away, orwent into care, they would keep all the profits and leave nothing for yourestate to pass onto your beneficiaries.
However, the vast majority of the market is now based on themodel known as a Lifetime Mortgage. Withthese plans you continue to own your own home and are borrowing money securedagainst it. In this way it is more likea traditional mortgage but with the advantage that it’s more flexible and youcan choose not to make payments during the term of the loan.
If you take out a lifetime mortgage equity release plan youwill still own your home. The plan issecured against your property, but it still belongs to you and will remain inyour name.
Under a home reversion plan, ownership transfers to thelender. Here at KIS Finance we only arrange equity release using lifetimemortgage plans.
However, under both types of plan you still retain the rightto live in your home for the rest of your life due to the ‘lifetime tenancyagreement’ that forms part of the agreement.
You can still move home with a lifetime mortgage, as theseequity release plans are transferable from one property to another. You willhowever need to check with the lender that the new property meets their lendingcriteria.
Taking out an equity release mortgage won’t stop you fromleaving your family an inheritance.
You could choose to use some of the money released to giveto your family early, which may be more helpful than having to wait for theirinheritance. It could also mean that anyinheritance tax due when you pass away is reduced.
If the value of your property goes up during the time thatyou have the loan your beneficiaries will benefit from any additional profitswhen the house is sold. The lender willtake back the loan amount plus any interest due, but the remainder will go toyour 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.
You can take out an equity release facility even if youstill have a mortgage. You will justneed to pay this off from the money released or from other funds that you mayhave available. After that you are freeto use the remaining money released for whatever you want.
Equity release schemes come with a ‘no negative equityguarantee’ which means that you will never owe more than your house isworth when it is sold. Any amount stilloutstanding on the loan will be written off by the lender and neither you noryour beneficiaries will be liable for any shortfall.
You can choose a plan with repayments to keep the overallcost down, but most plans don’t require any monthly repayments. The interest is simply rolled up each monthand paid to the lender at the end of the loan when the principle capital sum isalso repaid, out of the proceeds of selling the house.
If you do decide to take out a plan with repayments thesecan be voluntary, and optional interest only payments.
See an Illustration of how much interest charges cost over time with compound interest.
There aretwo different forms of equity release schemes:
All formsof equity release, other than home reversion plans, are referred to as lifetimemortgages and these are the most popular types of equity release schemes.
Alifetime mortgage enables you to borrow money against the value of yourproperty at a fixed rate of interest. The interest is added to the loan amount on a monthly or annualbasis. You can choose to make monthlyinterest repayments to prevent the interest from accumulating but many peoplechoose not to make payments.
Unlike ahome reversion plan, under a lifetime mortgage you remain the owner of yourproperty and can continue to live there for the rest of your life. The loan isthen repaid either when the homeowner moves into long term care or from theestate when the last homeowner passes away. Any remaining proceeds from the sale of the property are returned to theestate for distribution in accordance with the policy holder’s will.
With alifetime mortgage you can choose how you receive the payment, either as a lumpsum or in regular instalments.
With alifetime plan you will receive a one off tax-free lump sum payment for thewhole loan amount. This option is thesimplest one if you want a one-time cash payment for something specific.
You willhave two choices with a lifetime plan: interest only or roll-up.
With aninterest only plan you can repay the interest on a monthly basis, usually bydirect debit, to prevent the interest from accumulating. That way only the capital will be repayableat the end of the term.
With aroll-up plan the interest is added to the capital amount over the term of theloan. This may be done on a monthly oran annual basis depending on the lender. There are no monthly payments and the whole amount of the loan, plus theinterest accrued, will be repayable when the property is eventually sold, or ifthe borrower decides to redeem the loan beforehand.
Adrawdown plan gives you the flexibility to take an initial tax-free cash lumpsum, and then draw down the remainder of the loan in instalments when you wantit.
Theremainder of the loan will be held in an interest free cash reserve facilityuntil you need it and you won’t be charged any fees to make furtherwithdrawals. You will only be chargedinterest on the amount withdrawn, so if you don’t need all the money at once adrawdown plan could save you large amounts of interest over the term of theloan.
With bothlump sum and drawdown plans you can choose to make voluntary repayments under avoluntary repayment plan. The interestwill be charged in accordance with the terms of the type of scheme that youhave chosen, but in addition you can make voluntary interest payments to avoidthe compound interest from building up. The limit is up to 10% per year of the original sum borrowed and thereare three options available:
Full 10%- this involves paying the maximum 10% of the initial loan amount eachyear. If this continues over a number ofyears the full loan amount could be repaid.
Interestonly – this involves paying off the interest element of the loan either monthlyor annually, depending on the terms of the loan. This will then leave only the originalcapital amount to be repaid at the end of the term.
Randomrepayments – this allows you to repay amounts as and when you are able to doso, reducing the amount of interest that will be repayable over the term of theloan.
Anoptional repayment plan gives you the most flexibility. Like an interest-only plan you can repayinterest in monthly instalments to prevent it from building up, but you canchoose to stop making payments at any time if you need to.
Under ahome reversion plan the lender buys either a percentage of, or all of yourproperty, meaning you either co-own the property or that the lender owns it inits entirety.
Thelender won’t charge you interest and will provide you with a lifetime tenancyagreement, meaning that you can remain living in the property, rent free, forthe rest of your life.
Once youpass away or move into long term care the lender will sell the property. As they will have to wait until this time torecoup their money, the sum you receive for your proportion of the propertywill be reduced from the market value.
You cantake the loan either in one tax-free lump sum or in instalments to help boostyour retirement income.
Most homereversion plans will have an older qualify age than lifetime mortgages, oftenset at around 65 years old.
At KIS Finance we do not provide Home Reversion Plans
Last updated: 22 November 2023 | © KIS Bridging Loans 2024