If you're a homeowner over a certain age, you may be wondering what is equity release?
Equity release allows you to use your property as a source of cash, which may be useful when it comes to paying later life costs.
It could allow you to access and pay for the care you want in your later years, but it's a financial move that needs careful consideration.
This article will cover the big question of what is equity release and help you decide if it's a viable option for you.
Disclosure: You should not use this article to make financial decisions and we highly recommend you seek professional advice from someone who is authorised to provide financial advice.
Here’s a summary of what we’ll cover:
- Equity release is when you take out a loan against the value of your home while still living in it.
- It is an option for people wanting to access money to pay for care fees, including care at home, but does come with some risks.
- There are two main types of equity release schemes, a lifetime mortgage and home reversion.
- They carry different conditions regarding interest and repayment so one might be more suitable for your situation.
What is equity release?
Equity release is when you access the equity tied up in your home as ready to use cash without having to sell it.
It can be used to pay for home care costs, debts, inheritance tax or to create a steady income.
Unlike selling your home and using the money to downsize or move to a care home, equity release means that:
- You can continue living in your home until you move into a care home or pass away.
- The loan is repaid using the value of the property sale and can be protected by a special equity release guarantee.
- Equity can be converted to cash which could pay for home care costs that you need to live independently at home for longer.
- Extra cash may help you fund more or better quality home care or help you afford a high standard care home.
Confused about care funding?
Who can use an equity release scheme?
Equity release schemes are generally available to homeowners over a certain age, usually around 55.
There is a minimum age for taking out an equity release product as older people represent a lower risk to the lender.
To be eligible to use an equity release product, your home must be valued at least £70,000, and it must be your primary residence.
There may also be a minimum amount you can borrow as a one off sum, so check the conditions carefully for each provider and product.
What equity release products are available?
You can release equity into usable cash through two main financial products:
- a lifetime mortgage
- or a home reversion scheme
Effectively, you take out a loan through a financial provider that allows you to release between 20% and 60% of your property’s value.
However, the two products have different conditions to satisfy that affect your property in different ways.
It’s advisable that you consider carefully how each product might affect your financial status or property long term.
Lifetime mortgage
A lifetime mortgage is when you take out a mortgage secured on your property while retaining ownership.
The money you are able to loan is based on the value of your property, but you will also pay interest on this.
There are two types of lifetime mortgages which we will outline in this section.
Interest roll up mortgage
An interest roll up means that you don’t have to make any regular payments to the mortgage.
Instead, you get a lump sum or are paid a regular amount and get charged interest which is added to the original loan.
When your home is sold, the amount you borrowed, including the years of rolled-up is repaid with money from the sale.
What happens if you can’t pay?
- If the sale of your house isn’t enough to repay the mortgage, your beneficiaries might have to use money from your estate.
- To insure against this, most lifetime mortgages offer a no-negative-equity guarantee which is an Equity Release Council standard.
- This insurance means that your beneficiaries won’t have to pay even if the debt is greater than the property value.
Read more about Care home fees: what happens when the money runs out as well as are next of kin responsible for paying care home fees?
Interest-paying mortgage
With an interest paying mortgage you get a lump sum and make payments regularly.
This reduces the impact of interest roll-up and some plans also allow you to pay off some of the total amount if you wish to.
The amount you borrowed is repaid when your home is sold, with the interest already paid.
Benefits of equity release through a lifetime mortgage
- You might be able to set aside some of the value of your property as inheritance for your family which can be beneficial for inheritance tax threshold.
- Choose to make repayments or let the interest roll-up depending on the product.
- The loan amount and any interest accumulated is paid back when the property is sold.
- The no negative equity insurance protects your family against paying debts.
- You can move house with a lifetime mortgage, subject to some conditions.
Key points for lifetime mortgage equity release
Paying interest: Lifetime mortgages allow you to take out a loan which you must pay interest on either over time or as a lump sum. This can make it an expensive option as it is subject to interest rates which can change.
Live at home: You can still live at home with a lifetime mortgage and be in charge of upkeep.
Primary residence: The property you want to release equity from must be where you live.
Home reversion
Home reversion is an equity release option for people over 65 who know they are likely to remain at home and receive care.
This type of equity release allows you to release money by selling all or part of your property to a home reversion provider.
You can choose to sell a large portion or smaller portions over time, as and when you need the money.
In exchange, you receive a tax free lump sum or can choose to get paid in instalments as regular income.
Confused about care funding?
Where can you live if you opt for a home reversion plan?
You may continue living in your property as a tenant, as ownership will transfer to the home reversion company.
You will not have to pay monthly rent, though you will have to agree to maintain and insure it, plus pay council tax.
They are more suitable to people who plan to receive care at home as you can only receive 20%- 60% of the market value of your property.
So if you plan to move to a care home and may rely on money from selling a property, this would not be the best option.
What are the pros and cons of equity release through home reversion?
Pros
- A percentage of your property can be saved for inheritance by only selling part of it to the lender.
- You will always own the same percentage of your property regardless of the change in market values, unless you sell more.
- It’s a source of reliable access to funds for paying home care costs.
Cons
- You will receive considerably less for your property than if you sold it normally.
- Your property is no longer part of your estate and can’t be included as inheritance for the family.
- Repairs and maintenance to your property are your responsibility so you must have money to do them.
- Plans are inflexible, can’t be transferred and you may need certain permissions from the lender.
- You still have to pay council tax, utility bills and buildings insurance.
Is equity release a financially stable option?
There are lots of things to consider before taking out an equity release product to pay for care fees.
This is because they can prove to be an expensive option, due to the build up of interest you have to pay as well as set up fees.
For this reason, it’s important that you talk to a professional financial adviser to find out if it will be suitable for you.
Are there any downsides to equity release?
Equity release is a relatively safe way to access money when you need it through the value of your property.
However, it may not let you get the best value out of your property, which can be troublesome if care plans change.
- The money you receive from equity release might affect your entitlement to means tested benefits such as pension credit.
- You will have to pay set up fees, as well as for a financial advisor which can be expensive.
- Your home must be maintained and all related costs paid.
- The amount of inheritance you can leave to your family may be affected.
- Check if the product comes with a no-negative-equity guarantee.
- The value of your property when taking out an equity release plan may be less than market value.
Equity release to fund care
Equity release schemes can be used to help self-fund home care or access your preferred standard of care home.
Remember that as a self-funder, you will not be eligible for local authority funding for care, either at home or in a residential facility.
Equity release to pay for home care
Equity release can be a good idea for people wanting to self-fund their care while still living at home.
This means they remain in the comfort of their home while getting the care they need as they get older.
Both lifetime mortgages and home reversion plans are suitable for funding types of domiciliary care, as discussed.
But planning for the care you need, plus anything unexpected, is advisable when using equity release to fund care costs.
What services can be paid for using equity release?
As equity release plans allow you to access cash against the value of your property, home care services can be paid for using this money.
This could include the following domiciliary care services
- Personal care
- Respite care
- Live-in care and carers who sleep overnight
- Dementia care
- Befriending service and companion care
- Home help
As well as making adaptations to your home for your accessibility needs, or using services such as a day centre.
Equity release to pay care home fees
You can, in theory, use an equity release plan to pay for care home fees, though it may be more trouble than it’s worth.
If you are already classed as a self-funder but can’t afford the standard of care home you want, it could be an option.
Otherwise, if the council are already fully or partially funding your care home costs, equity release may overcomplicate things.
If you’re wondering about using an equity release plan to reduce your assets to get accepted for funding- this counts as deprivation of assets.
Confused about care funding?
Will equity release cover the cost of care?
Equity release can cover the cost of care for a short term period, but you may find that the money runs out.
In this case, you need to have a financial plan to cover the additional costs of your care, plus account for anything unexpected.
It is advisable to estimate the overall cost of care and budget accordingly, especially if you or your loved one has a progressive condition.
This is because they are likely to need more comprehensive care as the condition progresses, which means spending more.
Equity release and care benefits
Increasing your savings through equity release may affect any means tested benefits or eligibility for funding.
This means they could be reduced or stopped entirely once you receive the money from your loan.
This could affect financial benefits for elderly such as housing benefit, income support and pension credit, amongst others.
Disclosure: You should not use this blog to make financial decisions and we highly recommend you seek professional advice from someone who is authorised to provide financial advice.
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