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Equity Release Schemes in 2022 – Complete Review

best equity release schemes

For free and impartial money advice and guidance, visit MoneyHelper, to help you make the most of your money.

What are equity release schemes and where can you find the best equity release schemes in the UK? We take a hard look at equity release to explain how it works and who some of the best equity release lenders are. 

What is equity release?

Equity release is a way for older homeowners to borrow money against their home equity. It is often the case that seniors struggle to access credit due to their age, but equity release is a unique way of borrowing that doesn’t work like any other loan or credit agreement. 

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How does an equity release scheme work?

Equity release can be achieved in two ways, namely by using a lifetime mortgage or a home reversion scheme. The former is more common than the latter. Although these are two different equity release products, the way they work are fundamentally the same. 

Both provide the homeowner with a loan secured against their property and both do not require the homeowner to make any monthly repayments. The loan is paid off in one lump sum payment when one of three situations occur. These are:

  1. The homeowner dies – when the homeowner dies, the property must be sold and the money raised is used to repay the debt. The remaining sale proceeds go to estate beneficiaries. 
  2. The homeowner moves into long-term care – if the homeowner needs to move into long-term care, the property must be sold and the sale proceeds used to repay the debt. 
  3. The homeowner decides to exit the agreement – this will mean having to pay off the debt in cash, which may trigger expensive early repayment charges. 

If a property is jointly owned with a joint lifetime mortgage or joint home reversion scheme, then the debt will only need to be paid off once the last surviving homeowner dies or moves into residential care. 

Who is eligible for equity release?

Equity release schemes are only available to people over the age of 55. If two people are applying for a scheme together, then the youngest homeowner must meet this age requirement. Some lifetime mortgage providers – such as Nationwide Bank – have an upper age limit of around 85 years old. 

The homeowner(s) must own their own property with no debts attached. This means they should have paid off their mortgage already and have no other loans secured by their home. If you want an equity release product and have debts secured against your home, these will need to be paid off first. 

Sometimes it is still possible to get a lifetime mortgage or home reversion scheme with a small mortgage, providing you will pay this debt off when you receive your equity release lump sum. Your property may also need to exceed a certain valuation to qualify, which is usually around £80,000. 

What is the purpose of equity release?

Equity release is often one of the limited ways of borrowing for older people, and sometimes the only credit available. The lump-sum received can be used on anything the homeowner wishes, but it is often used as a way to make later life more enjoyable and comfortable. Some of the things that people spend equity release on are:

  1. Everyday expenses throughout retirement
  2. Holidays and cruises
  3. Home improvements (especially to make elderly living easier)
  4. Private medical care and treatments
  5. Investments

It is also possible to give the money away. This is usually done when a parent wants to help their son or daughter get onto the property ladder. You do need to be aware that financial gifts within seven years of death are still subject to inheritance tax.

Can you be denied equity release?

Even if you qualify for an equity release scheme in the UK, it does not mean you are guaranteed to get the loan. Lenders will assess your property using surveyors and could reject your application based on their findings. 

Some of the many reasons your application could be rejected are a) your home has been built with certain materials, b) it doesn’t conform with building regulations, and c) it is located in an area considered a flood risk.

Equity release lenders will even check your credit file to look for CCJs and property charging orders

What is the catch with equity release?

From afar, equity release can appear a superb credit option for seniors. These loans really do provide a tax-free cash lump sum based on the value of your home, and you do not need to make any repayments. 

There should not be any catches to your agreement if you have taken the time to research lifetime mortgage and home reversion plans, but most importantly, received equity release advice. However, the catch of equity release is considered how expensive these loans can become and how this affects how much wealth you pass on to family and loved ones. 

Whether you use a lifetime mortgage or home reversion plan, either form of equity release can potentially more than double your debt. The way the debt grows is different, but in either case, they become expensive. We have provided some examples in the following section to illustrate how expensive equity release schemes can become.

What are the different types of equity release schemes?

Lifetime mortgages and home reversion plans are the two types of equity release schemes in the UK. 

It is much more common to get a lifetime mortgage, and there are some variations of lifetime mortgages, such as an enhanced lifetime mortgage for people with a shorter life expectancy who want to access more equity than normal. 

#1: Lifetime mortgages

A standard lifetime mortgage applies interest to your loan amount. This interest does not need to be repaid each month, whereas a flexible lifetime mortgage allows you to make voluntary interest repayments. The interest debt gets added to your initial loan and therefore makes the total owed grow each month, which is why some people may prefer to make interest repayments and keep their debt lower. 

For example, someone releasing £65,000 of equity with a lifetime mortgage would owe close to £137,000 after 12 years when a 6.4% interest rate is charged. This money would be repaid through the sale of their property after death or after moving into care.

What are the average interest rates on a lifetime mortgage?

The average interest rates on a lifetime mortgage vary between 2% and 8%. The rate you are offered will depend on the value of your home, details about the property and your age. 

#2: Home reversion plans

Home reversion schemes do not charge the homeowner any interest on their loan. But the lender will ask for a fixed percentage of their property’s future sale. This percentage will be much larger than the percentage of equity released as a lump sum. 

For example, you may decide to release £50,000 from your £200,000 home, which is 25% of your equity. But in return, you may have to give the lender 60% of your future home’s sale money. This equates to a £120,000 repayment – or more if the value of your property increases. 

Do I have to receive a lump sum payment?

You do not have to receive a lump sum payment from equity release. It is possible to get a tax-free drawdown lifetime mortgage or home reversion plan instead. This is where you can access your loan amount in stages, which can save you interest and might ensure you still qualify for means-tested benefits.

Speak with your financial adviser to learn more about drawdown equity release. 

What is the best type of equity release?

The best type of equity release is a personal decision and requires bespoke equity release advice. Don’t just use any financial adviser to get equity release support, but use one with experience in this niche of finance. 

Moreover, only choose financial services from a company that is authorised and regulated by the Financial Conduct Authority. And in this instance, preferably a company that is a member of the Equity Release Council. 

In general, lifetime mortgages are advised because then your debt grows gradually over time and presents somewhat of a smaller risk compared to home reversion. Yet, a home reversion scheme offers more certainty of what you’ll end up repaying eventually. 

Where can you get an equity release scheme?

Equity release schemes are offered through dedicated equity release companies, finance companies that also deal with loans, investments and insurance – and sometimes some banks. 

There are few banks that offer equity release and those that do tend to only offer lifetime equity release mortgages. 

Getting help to find the best equity release schemes

Many equity release advice services also offer an extended brokerage service to help you find the best deals and opportunities. This will only be the case if you get independent advice rather than advice from a professional who works for a specific lender (which is also possible!). 

Some other options are to use an equity release comparison website or to compare deals using an online loan calculator. But in either case, you will still need professional advice before releasing equity 

Recommending the Equity Release Council

The Equity Release Council is a voluntary membership group for any company working in the sector, including lenders and financial advisers. They have created a lengthy list of rules and guidelines that all members must follow to uphold standards and move equity release away from a murky reputation. 

Many of the rules and guidelines have been made to protect homeowners and offer them additional protection, such as a guarantee that the homeowner can move and take their loan with them when suitable, and the infamous negative equity guarantee. 

The negative equity guarantee is an assurance that the lender will never chase debts that cannot be repaid through a property sale because the property sold for less than the total debt owed. The shortfall will not need to be paid by anyone or through the estate if the homeowner has passed away. 

Although it is not compulsory for companies to become members of the Equity Release Council, it is beneficial to do so and agree to the group’s rules as it makes the company or lender more attractive to potential equity release borrowers. 

What are the best equity release schemes (UK)?

The six lenders below are some of the good examples I found of equity release in the UK. The list is not exhaustive and you should always do your own timely research. Use these as a reference point only. 

  1. Pure Retirement

Pure Retirement is a company that exclusively offers equity release schemes. They are renowned for having exceptional customer service. Another hallmark that they are a good company to use is that they only accept applications directly from independent advisers. 

  1. More 2 Life

More 2 Life are a respected lender due to their flexibility. You can add and remove names from your equity release scheme at a low cost, and they have lower early repayment charges and even offer downsizing protection. 

  1. One Family

One of the USPs of One Family’s equity release schemes is that they provide financial advice for a fixed fee, which could save you money if you planned to take out a larger loan. They also have no early repayment charges for those downsizing after just five years. 

  1. Nationwide

Nationwide’s equity release mortgage is another option with free advice and £1,000 cashback that may be used for legal services as part of the process. You can also downsize with no early repayment costs after five years. 

  1. Aviva

Despite Aviva’s heft early repayment costs, they remain one attractive option due to their excellent customer service and a good deal of flexibility, such as the ability to add or remove names from a plan. 

  1. LV

LV are among the very best when it comes to early repayment charges. They start at just 5% which decreases to 3% after five years and 0% after 10 years. 

How much does releasing equity cost?

As explained earlier in this guide, either form of equity release is expensive to repay and this is referred to as the catch with these loans. But there are further costs associated with setting up these loans. 

Advice and legal cost can cost around £1,000 each minimum and there may be admin fees and other application charges to pay. At a minimum, you should expect to pay around £2,000 and £3,000 to get an equity release scheme in the UK. 

Is equity release taxed?

Equity release loans are not subject to any type of taxation. But there may be inheritance tax implications if you use equity release to give some of your wealth away – good or bad implications. This is best discussed with your adviser or an inheritance tax planner. 

Does equity release affect benefit payments?

Equity release will significantly increase your wealth, especially if you choose to receive a lump sum payments rather than a drawdown facility. This will not affect any benefit payments that are not means-tested, such as your state pension.

But heightened wealth can affect your eligibility to receive means-tested benefits. For example, having over £16,000 in the bank will mean you become ineligible for Universal Credit, and Pension Credits can be reduced from having £10,500 in the bank. 

If you plan on keeping much of your lump sum in the bank for a while, you may want to consider drawdown equity release so you still qualify for any means-tested state benefits. 

What are the pitfalls of equity release?

The main pitfall of equity release is not fully understanding what you are agreeing to and the implications this will have on your future. You should be cautious before agreeing to any loans secured against your home, but even more so with equity release, which is unaffordable to get out of for most people. 

When you do receive advice, make sure to be open and honest about everything or you could end up with the wrong type of agreement. For example, people who plan to move and downsize in the future will need an equity release scheme that allows them to downsize, pay off some of the loan and not be charged early repayment fees. Not telling your adviser or broker about these plans could be a costly mistake. 

Alternatives to equity release

If you have decided against releasing equity from your home because you don’t want to decrease the value of your estate, or for any other reason, there are alternatives to explore

One alternative is to downsize to a less-valuable home, which would enable you to create a small fortune and use this money for your retirement, private healthcare or whatever else. 

More you need to know about lifetime mortgages!

For more information about releasing equity from your home in all stages of life, keep tuned in to MoneyNerd.