Here at Conveyancing Expert our team of Conveyancing solicitors in Manchester get a number of enquiries from customers exploring whether equity release is an avenue they should pursue during retirement.
The equity release market appears to be holding steady during the first quarter of this financial year with statistics released by the Equity Release Council showing that the first three months of 2021 saw £1.14bn released.
This article aims to explain a little about equity release and how it operates.
What Is Equity Release?
Equity Release is a way of unlocking some of the equity in your property whilst you still reside there provided you are over the age of 55. So, it is a means of staying in your home while taking out a lump sum or a monthly income, from the money tied up in it.
How Does Equity Release Work?
Equity release is a way to turn the value of your property into a cash lump sum or monthly income. There are a number of policies which allow you to do this by releasing the equity (or cash) tied up in your home. You don’t need to have fully paid off your mortgage.
Equity release is like a type of lending. Your lender (new or existing) will release either the lump sum or regular amounts from the equity in your home. When you sell your home, die or require paid care, your lender will claim back the amount they lent you from the property. Interest is added to the amount taken from the property when it is sold, or it can be paid monthly.
Here are the two main ways in which Equity Release is done:
1. A Lifetime Mortgage.
A lifetime mortgage is the most common way of releasing equity from your home. It simply means you borrow against your property, paying it back when you die or need paid care. The interest accumulates and there are no monthly repayments. Some mortgage providers will let you pay interest monthly though rather than facing a huge payment at the end.
This is the most popular Equity Release Scheme. The loan does not have to be repaid until you pass away or move into alternative accommodation. Interest is usually at a fixed rate, compounded monthly and added to the outstanding loan so that the debt increases as time goes by.
Some Equity Release Schemes are portable, meaning if you want to sell your move house it may be possible for you to transfer the loan to the other property. Remember though, the lender will need to agree to the loan being transferred. This will be subject to their lending conditions at that time and whether the property you wish to purchase is suitable to secure their monies. You should also note that if you are considering downsizing at that time you may be asked to repay part of the loan you have borrowed.
The Equity Release Council builds protections into every approved provider’s plans. For example, they include a no negative equity guarantee, meaning that you will never owe more than the value of your home. You may also be able to protect a percentage of the equity in your property so that you are still able to leave a lump sum to your beneficiaries. A Financial Advisor can advise you on this in more detail.
2. A Home Reversion.
A Home Reversion means selling either the entire or part of your property to a lender. If you do this you will only get between 20%-60% of the value of your home but are allowed to remain in the property for the rest of your life, or until you move into long-term care. Again, this money can be a lump sum or a regular income. There is no interest since you are selling your home at a much lower rate.
What is the difference between a ‘Lifetime Mortgage’ and a ‘Home Reversion’?
- Value – A home reversion means you effectively sell your property but live there rent-free. You won’t benefit from any increase in its value. With a lifetime mortgage, you still own your home. If the value increases you will benefit and can use this to pay off the mortgage.
- Interest – There is no interest on a Home Reversion because you receive less than market value as the lender assumes it will be worth more in the future. With a lifetime mortgage, the interest ‘rolls up’ over the years, though in some cases, you can pay off the interest monthly.
Main points to consider for both ‘Lifetime Mortgages’ and ‘Home Reversions’:
- Are there age limits?
- Are there borrowing limits? With a lifetime mortgage you normally get around 60% for a or 20-60% of the value of your property for a home reversion. This depends on the value of your home, as well as your age and state of health.
- Interest rates must be fixed. If they are variable, there must be an upper limit on how much the repayment can increase.
- Ask your mortgage provider what happens if you decide to move.
- Check whether there is a ‘no negative equity’ guarantee. This would mean that if your debt increases beyond the value of your property, you will not need to pay anything.
- Ask whether you can choose to take out a lump sum, smaller sums when you need them, or both and the interest implications.
- Can you ‘ringfence’ some of your property? This would protect a certain amount of your money.
Who qualifies for Equity Release?
You usually have to be 55 or over (usually older for home reversion) to release equity. Also, there may be limits on how much of your home you can borrow against.
Your property needs to be your main residence, and you will have had to pay off your mortgage though in some cases, you could use an equity release to pay off the remainder of your mortgage.
Are there any risks to Equity Release?
If you start releasing money quite early, or take a large sum, it would be easy to accrue huge interest. If the amount of released equity plus the interest is worth more than your property then when you die you will leave behind a large debt. Some equity release schemes have a ‘no negative equity’ clause. This caps the amount of the total value of the property. Some allow you to ring-fence some of the value of your property.
If equity release is done too early and you wish to move home, you might not have enough equity left in your home to buy a new property to buy a new one.
If you are on means-tested benefits, they may be affected by equity release. If you are on reduced council tax, income support or other benefits, they may be reduced.
Are there advantages to Equity Release?
The obvious advantage is more money in your account whilst enjoying your current home. It might save you from downsizing or going into rented accommodation.
Are there other options to Equity Release?
- If you just want a one-off lump sum, a loan might be easier.
- If you are looking to alter your property to accommodate later life or a disability, there could be grants available.
- If you are looking to free up some money from your property, downsizing is an option, though take into account the costs associated with moving, including conveyancing solicitors,, surveys, and stamp duty etc.
What are the costs of Equity Release?
There are four possible costs when it comes to applying for equity release:
- Conveyancing Fees
- A financial advisor
- Lender’s application fee
- Valuation fee
If you are interested in equity release and setting it up, talking to a conveyancing solicitor who specialises in equity release. When you are ready to go through with the process, the conveyancing solicitor will be able to get the process in motion. Home reversions can take slightly longer than lifetime mortgages. In general, the process can take around 6-8 weeks.
Do I need a Residential Conveyancing Solicitors For Equity Release?
Taking out an equity release plan is a big step and so it’s vital that you have expert impartial financial advice. The Equity Release Council (ERC) rules stipulate that to take out an Equity Release plan you must consult a conveyance solicitor.
They must be independent of the lender’s solicitor and rules state you must have at least one face-to-face meeting with them.
Your Residential Conveyancing Solicitor will:
- Check your identity (to comply with Money Laundering Regulations).
- Meet with you face to face
- Check your ID documents during this meeting.
- Ensure that all your property paperwork is in place, such as title deeds, buildings insurance etc.
- If you are paying off your existing mortgage with your equity release funds, your conveyancing solicitor will also take care of that for you.
- Agree your completion date with your lender and arrange for the transfer of the money to your bank account.
And Finally
Another important part of the process is that you also have independent legal advice so much so that it is part of the Equity Release Council’s ‘rules and regulations’. Conveyancing Expert are a team of conveyancing solicitors based in Manchester and can offer you impartial expert conveyancing advice.
Conveyancing Expert are a team of legal professionals who are dedicated to efficiency and honesty and ensure that every client benefits from our expertise. We continually educate ourselves and guide our clients, excelling at customer service.
Our services are always high quality, value for money, and we employ effective case management systems to ensure smooth transactions and happy clients.
Please contact us here, give us a call on 0161 794 7799 or email: enquiries@conveyancingexpert.co.uk
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