Equity Release/Lifetime Mortgage FAQs
What is Equity Release?
There are two main types of equity release:
- Lifetime mortgage. This is the most common type of equity release. You borrow money secured against your home. The mortgage is usually repaid from the sale of your home when you die or move permanently into residential care.
- Home reversion plan. You raise money by selling all or part of your home while continuing to live in it until you die or move into permanent residential care. The main drawback is that part or all of your home has been sold, thus you give up any right to any possible future capital appreciation, whilst usually being responsible for the maintenance of the property.
Steve Davies Independent Mortgage Services Ltd are not authorised to advise on Home Reversion Plans.
Who can get a lifetime mortgage?
There are a number of conditions that you must meet before being able to take out an equity release plan:
- For a Lifetime Mortgage you, or both of you, if borrowing jointly, must be at least 55 years of age.
- You must own property in the UK.
- Your property must be in reasonable condition and over a certain value, and there may also be restrictions on the type of property accepted.
- If you have a mortgage or secured loan on your property you may still qualify for equity release, but it will depend on the value of your home and the amount outstanding on the existing mortgage or loan. You’ll have to pay off any outstanding mortgages or loans secured against your home at the same time as taking out the equity release plan.
- Equity release may not be suitable if you have dependants living with you. Any dependants should take separate legal advice. If they wish to remain living with you in the property, they may need to sign a waiver confirming that they understand they don’t have the right to reside there if you die or move into permanent residential care.
How can I use the proceeds from Equity Release?
You can use the cash that is released for any purpose you wish. Usually the cash is used to:
- Pay-off an outstanding mortgage on retirement.
- Provide a tax-free income, by using a drawdown facility, taking small sums from the equity release plan over time.
- Extending or renovating the home.
- Buy a holiday of a lifetime.
- Put towards buying a holiday home.
- Buy a new car.
- Gift money to relatives, often to get them started on the housing market.
Could I Lose my Home?
Rest assured, you will never lose your home due to an Equity Release scheme (subject to you meeting your obligations under the policy). We work within Equity Release Council guidelines, which specifically state that we can’t recommend plans that do not allow you to stay in your house for the lifetime of the loan.
Typical obligations would include:
- Not giving false information on the application form;
- Maintaining the property;
- Insuring the property;
- Not leaving the property unoccupied for more than 6 months, without having been taken into care.
Would taking out equity release affect my benefits?
Getting a large lump cash sum from Equity Release will not affect your standard state pension or any benefits based on disability or health, but if your savings go above a certain level it will affect any means-tested benefits you have now or may be entitled to in the future.
Means-tested benefits may be reduced or lost entirely and currently include:
- Pension Credit
- Jobseeker’s Allowance
- Income support
- Income-related Employment and Support Allowance
- Universal Credit
- Council Tax Support
There is a possible way to get around this. Using a drawdown Equity Release method, you can take your money in a series of smaller amounts to keep your bank account below the necessary level.
You should always get specialist advice regarding benefits before taking out an equity release plan. Advice can be sought from the Department of Work and Pensions, Citizens Advice, Age UK and your Local Council.
Why do I need to get professional mortgage advice?
Taking out a lifetime mortgage is seen by many people as part of their financial plan for retirement. However, it is important that you are happy with how these plans work and the terms and conditions associated with your particular plan. You need to understand your obligations, how the plan will impact any inheritance that you leave to your beneficiaries and how it may affect your rights to state benefits. Because of this it is a regulatory requirement to speak to a financial adviser before taking out a lifetime mortgage. Independent Financial advisers, such as ourselves, have the job of listening to your needs, and exploring all the possible solutions to meeting those needs which could include, amongst others, downsizing, taking out a personal loan, taking out a standard mortgage or taking out an equity release plan. We then recommend a suitable plan that best meets the needs identified.
Many equity release advisers solely recommend equity release. Steve Davies Independent Mortgage Services Ltd can offer advice on all mortgages available in the market and can thus offer potentially cheaper options available in the general mortgage market, that might not be considered by an adviser only offering equity release plans.
You should also ensure you are talking with an adviser who is Independent and offering advice from the whole of the market. Some advisers only offer advice from one lender, with no fees being charged. But you may end up paying a higher rate of interest, which over time may erode any benefit from not having paid fees to an independent adviser, thus costing you more in the end.
Can I move house with Equity Release?
Absolutely. Again, the Equity Release Council guidelines state we should only recommend ‘portable’ schemes that let you move house if you need to. You never know what might change in your life, and if you might want to move closer to family or live in a more practical home.
Be aware that if you do move, the provider will want to carry out an assessment of your new home to make sure it meets the terms of the loan and will provide adequate security. On occasions, you might have to pay back some of the loan if the new property is worth less than your current one.
Do I Have to pay tax on the money I receive from Equity Release?
No – all cash taken out of the value of your house is tax free. It was already your money to begin with; no cash has changed hands and you have not increased your wealth. You are simply using your resources in a different way.
What is the Equity Release Council?
The Equity Release Council (ERC) is an organisation that was created to promote and support providers offering equity release products. The council is committed to ensuring that consumers are safeguarded and providers offer products that meet the Equity Release Councils rules and principals.
The ERC product standards are:
- For lifetime mortgages, interest rates must be fixed or, if they are variable. There must be a “cap” (upper limit) which is fixed for the life of the plan.
- You must have the right to remain in your property for life or until you need to move into long-term care, provided the property remains your main residence and you abide by the terms and conditions of your contract.
- You have the right to move to another property subject to the new property being acceptable to your product provider as continuing security for your equity release loan.
- The product must have a “no negative equity guarantee”. This means that when your property is sold, and agents’ and solicitors’ fees have been paid, even if the amount left is not enough to repay the outstanding loan to your provider, neither you nor your estate will be liable to pay any more.
All products recommended by Steve Davies Independent Mortgage Services Ltd will comply with these standards.
Why must I have independent legal advice?
It is a requirement that independent legal advice is sought before an equity release plan is put in place. You may choose your own solicitor to carry out the legal work in connection with your plan, this could be a solicitor you have used before, but they may not have much experience with equity release, or we could recommend one that we know has experience with equity release plans.
Before the plan is completed, your solicitor will be provided with full details of the plan, including the rights and obligations of both you and the product provider. Both you and your solicitor will be required to sign a certificate confirming that these rights and obligations have been explained to you and that you wish to enter the plan.
You will be provided with a fair, simple and complete presentation and explanation of your equity release plan. The benefits and limitations of the plan will be clearly set out, together with your obligations under the terms of the contract.
You will be given information about:
- All the costs that you will have to bear in setting up the plan;
- The tax implications;
- What will happen if you wish to move to another property; and
- How changes in house values may affect your plan.
How much can I release?
The amount you can borrow will depend on your age, your health and of course how much your property is worth.
If the Equity Release loan is likely to last a shorter period of time, then the lender will offer more. If the loan might accumulate interest over many years, they will probably offer less. All schemes guarantee that the debt amount will never exceed the value of the house.
Can I leave an inheritance?
Yes, we can make sure that a share of your property’s value is protected for you to leave to the ones you love when you die. You should talk to your Equity Release adviser about this when you go over what you need from the scheme, and they will allow for this when they look into the right plan to suit your needs.
Can I borrow more if my home increases in value?
If you find yourself in this fortunate position, then it could be possible. It will depend on the scheme you already have in place and how much cash you have already released. If the market value of your house seems stable, and there is enough potential cash in it to allow for a loan increase, then your provider could be open to lending more.
I’ve already got an equity release plan – can I switch?
Did you take out your existing Equity Release plan quite a few years ago, and are wondering if a current scheme could give you a better deal? You are not alone. Similar to a mortgage agreement, it is possible to switch schemes and our adviser will be able to look at an alternative that is better suited for your needs.
If you terminate your plan before the end of term, the lender might impose an early repayment fee. It depends on the provider’s policies and the terms of your current loan.
Can I payback my Equity Release plan?
If you think you might want the option to pay back the Equity Release loan at some point in the future, then you should discuss this with your adviser before you take out the scheme. Some plans do allow you to pay back up to 10% of the loan per year with no penalty, while some others offer low early repayment charges after five years, or no charge at all after eight years.
In general, Equity Release providers will charge you a repayment fee if you repay the loan early, to reflect the lost interest from a longer loan period. How much will depend on how long you have had the loan for, the terms of the loan and your provider’s policies.
Do I need to change my will?
We would recommend that you review your will when taking out a lifetime mortgage. You don’t usually have to alter your will, depending on how it is written.
Should I have a Lasting power of attorney (LPA) set up?
We would highly recommend that you have a LPA- Financial set up when an equity release plan is taken out, particularly where there is drawdown arrangement, as otherwise it may become difficult and lengthy to arrange any subsequent drawdowns.
Can I release the equity in my holiday home, second home or buy to let property?
Yes, this is possible in each case. If you fully own a second property and stay there for at least 4 weeks of the year, then it may be eligible for Equity Release.
In the case of a holiday home, you must be freely able to use it, or it should only be let out for a maximum of 4 weeks in a row at any time. It must not be advertised as a holiday let anywhere. Also, to qualify as a second home, you must spend at least 4 weeks a year there, and it must not be in close proximity to your main residence.
With buy-to-let properties, at least one provider has created a dedicated buy-to-let Equity Release scheme for landlords to obtain the capital to grow their property portfolio, as well as give them access to a lump sum.
Can I use a lifetime mortgage to reduce my Inheritance Tax Liability?
Yes, putting a lifetime mortgage in place may have an impact on the amount of inheritance tax your estate will have to pay. However, this is a complex issue and depends on the value of your estate, your situation as well as your personal circumstances, so you should always get specialist tax advice.
Equity release may require a lifetime mortgage or home reversion plan. Steve Davies Independent Mortgage Services Ltd are not authorised to advise on Home Reversion Plans. To understand the features and risks, ask for a personalised illustration.
Equity Release is not right for everyone. It may affect your entitlement to state benefits and will reduce the value of your estate.