4 Little Known Truths about Equity Release

Are you curious about equity release and how it works? If so, you're in the right place. Today, we're going to share four little-known truths about this popular way to borrow money.

We understand that the process of equity release might seem confusing. It’s a big step, and it’s important to know the facts before you make a decision, which is why we’re here to help you.

In this article, we’ll cover:

• What equity release is and how it works.
• The risks that come with releasing equity from your home.
• The difference between lifetime mortgages and home reversion schemes.
• How to get a realistic quote for equity release.
• Four little-known facts about equity release.

We have a lot of experience and knowledge about equity release, and we’re keen to share it with you. We know how important your home is, and we want to help you make the best decision for your future. So, let’s start learning about equity release together.

Hold on – what’s equity release? (Recap!)

Eligibility depends on the product, age, property, credit circumstances and any required affordability assessment. Minimum property values and borrowing limits are lender-specific. An existing mortgage normally has to be cleared at completion, often using some of the released funds.

Most standard lifetime mortgages start at age 55, but some payment-term lifetime mortgages are available from 50 and require interest payments for an agreed period. Home-reversion minimum ages and all other eligibility rules depend on the provider. Check the youngest applicant’s age and the actual product criteria. Many lifetime mortgages allow interest to roll up without regular payments, but some require interest payments for a set period. Optional repayments, limits and any early-repayment charges depend on the contract. See related guidance.

A lifetime mortgage is a loan secured on your home; you retain ownership. Interest that is not paid is added to the balance. The loan is usually settled when the last borrower dies or moves permanently into care, subject to the contract. Required or optional repayments vary by product.

Little-known truths about equity release

The equity release industry has been cleaned up over recent decades with much fewer equity release horror stories hitting the press. 

But lots of homeowners still don’t know exactly how they work today, especially when it comes to tax on equity release. Here are some of the truths about equity release you don’t always hear!

#1: You don’t have to take a lump sum

Some lifetime mortgages offer later drawdowns from an agreed facility, subject to limits, terms and rates for each withdrawal.

The benefits of a drawdown equity release plan are:

1. Interest is only applied on the amount taken – not the amount approved. This can save you money.
2. Drawdowns might help you budget for projects
3. Drawdown changes when funds are received, but does not guarantee benefits eligibility. Obtain advice on capital limits, disregards and deprivation rules.

#2: You can still move home

Moving may be possible if the new home meets the provider’s criteria. A lower value may require partial repayment or charges.

You might not be able to move into some properties which will be harder for the lender to sell, such as boathouses or properties above commercial premises. 

#3: Downsizing protection has conditions

Some plans waive early-repayment charges when downsizing-protection conditions are met. The qualifying period, property requirements and repayment terms must be checked.

#4: You still own your home

With a lifetime mortgage, you retain ownership subject to the lender’s security. Home reversion is different: you sell part or all of the property.

What is the downside to equity release?

The major downside to equity release plans is that they can become very expensive to repay. This applies to both lifetime mortgages and home reversion plans.

With the more common lifetime mortgage, the debt can easily double or triple over a couple of decades.

This can severely reduce the value of your estate that you pass on to loved ones.

Compare the costs and risks with other options, including:

1. Downsizing
2. Renting part of your home out
3. Asking family members for help 

Lifetime mortgages and home reversion schemes

The two types of equity release schemes in the UK are called lifetime mortgages and home reversion schemes.

A lifetime mortgage is a secured loan; the amount depends on the actual age, property and product criteria.

Many lifetime mortgages allow interest to roll up without regular payments, but some require interest payments for a set period. Optional repayments, limits and any early-repayment charges depend on the contract.

A home reversion plan is a sale of part or all of your home, usually below open-market value, in return for money and the right to remain under the plan’s occupancy terms. It is not a loan. The provider receives its agreed share when the home is sold.

Illustration only: selling a 75% share of a £150,000 home for £45,000 gives the provider 75% of the eventual sale proceeds under the agreement. This is a sale below market value, not a quoted offer.

You can learn more about both by reading this equity release explanation guide.

Is equity release really a good idea?

Despite the potential costs to repay an equity release plan, it can still be a good idea for some homeowners. The money could help fund many different things and improve the quality of life in your twilight years. 

It’s an easier decision for those who don’t have children to pass on their home and wealth, or if your children are already financially secure.  It’s worth taking the time to read all of the equity release advantages and disadvantages.

Do you lose money with equity release?

Equity release has real costs and can reduce your wealth and future options. A lifetime mortgage creates debt, while home reversion sells ownership below market value.

An estate may retain value after repayment or retain the home if settled from other funds, but neither result is guaranteed.

How safe is equity release?

Regulation, advice and product safeguards reduce some risks but do not make equity release risk-free. Check the actual protections and conditions. See related guidance.

1. Mandatory equity release advice – you must receive professional equity release advice before signing up for a lifetime mortgage. This ensures you are fully aware of the consequences and that it’s the right move for your needs. 

2. For a plan meeting the relevant Equity Release Council standards, the right to remain depends on keeping the property as your main residence and meeting the contract terms. A no-negative-equity guarantee limits repayment to the net sale proceeds when its conditions are met; it does not stop the balance growing or make the product risk-free. See related guidance.

3. Other guarantees and assurances – there are further guarantees when using an Equity Release Council member, such as allowing you to move to a suitable property and take your plan with you.