What Is 100% Equity Release? Overview & FAQs
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What is 100% equity release, and is it possible?
If you want to access a tax-free lump sum with no monthly repayments, equity release is the only option. But can you really get 100% equity release and still not have to make monthly repayments? Let’s find out as we recap on the different types of equity release available and ask how much equity you can release from those plans.
What is equity release?
Equity release is a way for older homeowners to access some of their home equity as a cash lump sum or drawdown without having to make monthly repayments. Instead of repaying each month, the money is only repaid from the sale of their house in the future. These plans are designed to last for life, which is why they have huge early repayment charges.
Many types of personal loans and credit are unavailable to seniors, especially if they have already retired. Thus, equity release plans are one of the only ways to get a loan in later life.
To qualify for an equity release product, the homeowner must have already paid off their mortgage and be at least 55 years old. They may need to be older in some cases. The property they release equity from must be their main residence and it must be of a minimum value set by the lender.
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How exactly does equity release work?
There are two types of equity release, namely lifetime mortgages or home reversion plans. The specifics of each are explained below, but both work in a similar way.
They allow the homeowner to access some equity as cash and only ask for the money (plus interest in the case of a lifetime mortgage) to be repaid from the future sale proceeds of their property. Their home will be sold after death to repay the loan, or earlier if they move into long-term care.
A lifetime mortgage charges a fixed interest rate on the money borrowed by the homeowner. This interest does not have to be repaid and so it rolls up, creating a bigger debt each month. Some homeowners ask to make voluntary interest payments to stop their debt from growing exponentially, which can be the case. Many people with lifetime mortgages see their debt double or more after 10-15 years.
Home reversion plans
Home reversion plans don’t charge interest but get the homeowner to agree to give up a much greater percentage of the property’s future sale proceeds in contrast to the percentage of equity taken out. For example, releasing 25% equity today could result in having to pay back 65% equity when the property has to be sold, which could be soon after the plan is agreed or decades after.
What is the catch with equity release?
If you hadn’t noticed already, the main catch with equity release is that it becomes expensive. Because a lifetime mortgage has compounded and rolled-up interest, and because home reversion plans ask for more than double the money back in the future, using equity release is undoubtedly expensive.
The cost of equity release may not be a concern for many people who do not have children to leave their estate to, but if you have estate beneficiaries who would benefit from your wealth, the decision can be difficult.
What are 100% equity release schemes?
A “100% equity release scheme” would be a lifetime mortgage or equity release plan that allows the homeowner to access all of their property’s value as a loan.
Can you get 100% equity release?
But do not expect to be allowed to release 100% of your equity through a lifetime mortgage. Because the lender is relying on the property sale to repay the debt, they run the risk of not making a profit from the future property sale if they loan the homeowner all of its value and the property value remains the same or decreases.
Most lenders commit to a negative equity guarantee, which states they cannot recover debt above the property value. So, most or all of the debt arising from interest would not have to be repaid if they have already given a 100% equity loan. This is another reason why you will not find a lifetime mortgage offering 100% equity loans.
Home reversion plans don’t usually allow homeowners to access 100% equity release loans, but they are not completely out of the question. The lender would need to be extremely confident that the property is going to increase in value – and other factors would be considered, such as your age and possibly even your health.
How much equity can you release with a lifetime mortgage?
Lifetime mortgage lenders usually allow the homeowner to access up to 60% of their home equity in the best possible cases. For example, if you own a £200,000 home with no outstanding mortgage, the absolute most you could get using a lifetime mortgage will be around £120,000, either as a lump sum or through a drawdown facility. Always remember that releasing more equity will cost you more, which should be illustrated when using an equity release calculator.
Note, there is a variation of these loans called an enhanced lifetime mortgage. These equity release plans take into account the homeowner’s health issues and may offer them to release more equity than normal to help improve the quality of life and usually to pay for private care services. No medical is required but the application process may include a health questionnaire and you may have to submit medical records as evidence.
How much equity can you release with a home reversion plan?
Home reversion plans typically allow homeowners to access slightly more of their equity than lifetime mortgages, up to around 80%. So, you could get a loan of up to £160,000 on a £200,000 home. In return for borrowing large amounts of equity like this, you should expect to be giving the lender 100% of the future sale value of the home with nothing left for your beneficiaries.
What determines how much equity you can release?
The lender will look at multiple factors to determine how much equity you can release with either equity release products. They will analyse:
- Your age – and your health in the case of an enhanced form of equity release. Older people may be able to access more equity because they are deemed to have a shorter life expectancy, even though this may not be true.
- Details about the property. The property value, location, projected value and other details can also contribute to how much equity the lender is willing to let you take out.
What are the pitfalls of equity release?
The biggest pitfall of equity release is using a plan when there are better options for your circumstances. It’s essential to use an independent financial adviser who is authorised and regulated by the Financial Conduct Authority (FCA). Some equity release companies will offer their own financial advice, but it is highly recommended to use independent services to ensure you are not mis-sold equity release.
Another potential pitfall of equity release is using a lender that is not a member of the Equity Release Council (ERC)l. That is not to say that all lenders who are not members of the ERC are bad and should be avoided, but choosing an ERC member offers guarantees and assurances.
The Equity Release Council (ERC) and its benefits
The ERC is a voluntary membership group that welcomes equity release lenders and financial services companies to join. If they do join, they must abide by the group’s rules and guidelines designed to protect homeowners, which ultimately makes them more appealing to those homeowners.
Some of the benefits of choosing an ERC lender over other lenders are:
- They guarantee you’ll never be evicted and forced to sell
- They guarantee you will never have to pay debts that exceed the sale value of your home, and neither will your estate and estate beneficiaries
- They promise you can move to a new home and take your lifetime mortgage with you
Does equity release affect state benefits?
Some state benefits are awarded with the condition that you have less than a set amount of money. These are known as means-tested benefits. For example, Universal Credit is only given to people who have less than £16,000.
Releasing equity could push your wealth above the thresholds to receive means-tested benefits. The good news is that the state pension is not means-tested and you will still receive your state pension after using an equity release plan. However, Pension Credit payments are based on the amount you have in the bank. At the time of publication, your Pension Credit payments are reduced by £1 for every £500 you have above £10,000, so having £11,000 savings would see your payments reduced by £2.
Releasing equity could mean not being eligible to receive any Pension Credits or other benefits. This can have a knock-on effect on your eligibility to receive other state benefits. For example, not receiving Pension Credits could stop a council tax reduction benefit.
Discuss this issue when you receive financial advice as there may be ways around the problem, such as choosing a drawdown over a lump sum loan.
Do you pay tax on equity release?
No matter what type of equity release plan you take out, you are using a loan, and credit in the UK is never subject to tax. Sometimes equity release can feel like you are selling some of the value of your property early and might be subject to Capital Gains Tax. But this is not the case. However, equity release can have inheritance tax implications which should be discussed with your financial adviser.
An alternative to equity release
An alternative option to equity release with no borrowing required is to downsize your home to a smaller and less valuable property. This could be difficult due to the stresses of moving and the sentimental attachment to your current home, but it could also create a financial cushion for your retirement.
By selling your home and buying a less valuable one, you create a pool of money that can help fund retirement, care services, home improvements and more.
Why can’t you get 100% equity release (Quick recap!)
There is a very small chance that you can get 100% equity release through a home reversion plan, but most of the time 100% equity is a pipedream rather than a reality.
It would not make financial sense for lenders to offer a lifetime mortgage or home reversion plan and offer 100% of the property value as a loan because it puts them at great risk of not making a profit or not making a large enough profit on the credit agreement. If the property declines in value they will lose money.
Want to learn more about equity release in the UK?
For further information about equity release and how much you could borrow as a senior homeowner, stay tuned to MoneyNerd. We’ve started publishing plenty more guides and articles asking the FAQs associated with equity release. We’ve probably answered your questions already!