Equity Release – An Easy Retirement Option?

Equity Release – what is it?

An equity release scheme allows for individuals who may be at the point of retirement, or approaching the requisite age, to free up money from their property.

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Predominantly, an equity release will appeal to those who may be asset rich but cash poor. In simple terms, the process entails an application for a type of mortgage based on equity release principles; or selling part, or all, of the prospective borrower(s) property. Broadly speaking, equity release appears to offer the ideal solution to those who may not wish to down size to a smaller and, more often than not, less attractive property.

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A majority of equity release arrangements are mortgage-based products secured against the home.  The loan becomes repayable only upon death of a borrower (in cases of multiple borrowers the loan is repayable on the death of the last surviving) or, once the surviving borrower is placed into long-term care. These are known as lifetime mortgages.

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Lifetime mortgages allow for a loan to be taken on a property in return for a cash lump sum, or regular smaller sums. This money can be spent in whatever way the borrower(s) may wish. The property continues to be owned by the borrower(s), and they retain responsibility for maintenance and payment of the household bills.

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A home reversion plan provides an alternative means of equity release. Essentially, the home owner would sell all, or part, of their home to a company in return for a lump sum, or regular income, and the right to continuing occupancy.

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However, these schemes can prove to be an expensive way of borrowing, particularly if the life expectancy of the borrower is for a number of years.  The interest compounds at a rapid rate as no repayments are required until the death of the last surviving borrower.   Interest is charged on the total amount of the loan, including the interest that has already accumulated throughout the years.  In essence, at the end of an equity release plan the borrower or potentially their family,   could owe the whole value of the property to the equity release lender.  Many reputable lenders will offer a no negative equity guarantee:  therefore, the borrower(s) debt cannot exceed the value of their property.

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In consideration of the aforementioned, it becomes a fundamental duty for the borrower(s) to offer transparency to their family and/or beneficiaries prior to proceeding with the equity release.  It is norm for the lender to offer the loan on the basis that the borrower(s) legal representative will notify their client of the need to advise family/beneficiaries that any potential inheritance may be adversely affected.

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However, equity release is a useful source in long-term care planning in terms of preparing for care within the home rather than a residential home.   The borrower should be conscious of the fact that should the need arise for residential care equity release is not the most suitable option. Many equity release arrangements provide a clause that requires the property to be sold and the loan to be repaid in full.

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In the coming years, equity release could form part of the nation’s long term retirement plan due to the abolishment of rules that effectively forced many retiring workers to buy an annuity.  Potentially, individuals have the option to draw down from their pension pot in the earlier years of retirement, and then release money from their home once they hit their 80s.