How Much Equity Can I Release? Complete Analysis
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How much equity can I release with a lifetime mortgage or home reversion plan? This is a common question and one that may decide whether equity release schemes are worthwhile to you.
Unlike other methods of borrowing, the amount of equity you can release is not determined by finances and credit scores. Let’s recap on the different equity release schemes before answering our main question and related queries.
What is equity release?
Senior homeowners who want cash to fund private care, home renovations, trips abroad or just as a retirement nest egg may want to consider equity release.
An equity release scheme allows seniors – usually with a minimum age between 55 and 65 – to release equity as a lump sum or drawdown facility without needing to make monthly repayments. Instead of paying back the loan and any interest monthly, the money is repaid from the sale proceeds when your home is sold.
You are never forced to sell your home unless you move into long-term care and the property is no longer lived in by either of the homeowners. If you never move into aged care then the home will be sold after you pass away.
You should only consider an equity release plan from a lender that is authorised and regulated by the Financial Conduct Authority. Moreover, they should be members of the Equity Release Council to afford you more assurances and guarantees.
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Who’s eligible for equity release?
An equity release loan is only available to senior homeowners. Don’t confuse these schemes with home equity loans or second charge mortgages, which are also loans that also borrow against your home equity – but must be repaid monthly and are available to anyone 18+.
Most lenders set a minimum age requirement between 55 and 65. If the home is owned by a couple, the youngest must meet this minimum age requirement.
Moreover, to release equity from your home with one of these schemes, the home must be your main residence and it usually has to have a minimum value, typically around £75,000. Your mortgage should have already been paid off.
Why release equity?
Seniors may choose to release equity to help pay for a more comfortable retirement, which will mean different things to different people. Some may just want a pool of cash to live off more comfortably any pay for home improvements, others may require private at-home care services or may want to go on adventures and cruises.
The conundrum with equity release is that it gets expensive and can severely decrease the value of your estate passed on to loved ones. If your children and grandchildren would significantly benefit from your estate and 100% of your property, choosing an equity release plan can be difficult and even make you feel guilty.
Although not mandatory, talking it over with loved ones may help you make a decision.
The different types of equity release
There are two main types of equity release in the UK with one of them having a sub-type. These are:
- Lifetime mortgages
- Enhanced lifetime mortgages
- Home reversion schemes
(Enhanced) lifetime mortgage
A lifetime mortgage allows the senior homeowner to access an amount of equity with a fixed interest rate. As mentioned, neither the loan amount nor the interest needs to be paid back through monthly payments; the debt will be collected when the home is sold. But because the interest owed rolls up and adds to the total debt, they can become expensive.
For example, releasing £65,000 of equity with a standard 6.4% interest rate would more than double the debt after just 12 years. The good news is that lenders that are part of the Equity Release Council commit to a negative equity guarantee, which means you can never owe more than what your home eventually sells for, i.e. no shortfall will be recovered from savings, your estate or estate beneficiaries.
An enhanced lifetime mortgage works in the same way but is designed to help people with a shorter life expectancy to release more equity than standard. The amount of equity you could release is increased if you have a shorter life expectancy because it is less risk to the lender. To determine how much equity you could release with an enhanced lifetime mortgage, the applicants must fill in a health questionnaire and possibly hand over medical records as evidence.
Home reversion scheme
Home reversion plans are a different type of equity release loan and are less common than a lifetime mortgage. They do not usually charge interest but can still be expensive. They work by allowing the homeowner to access some of their home equity but the homeowner simultaneously agrees to give the lender a much greater percentage of their property value in a future sale.
For example, you may release 20% of the value of your home but then need to give the lender 60% of the sale proceeds from its future sale, either after moving into long-term care or from your estate after death.
So, how much equity can I release?
No equity release scheme will allow you to release the total value of your home as cash or a drawdown. Even though your property value may increase over time, the lender needs to create a greater buffer to ensure they will get their money back and make a profit on any future sale.
In fact, most equity release providers offering a lifetime mortgage work from a maximum loan to value (LTV) ratio of 60%, meaning the maximum amount of equity you can release from your home in a best-case scenario is around 60%. For example, if the value of your property is £200,000 then the absolute most you could get from releasing equity will be around £120,000.
With a home reversion plan, some lenders are a little bolder and will allow you to release up to 80% of the value of your property as a lump sum or drawdown. The lender will need to be extremely confident that your property will increase in value to agree to a high equity release due to no interest being charged to increase the debt.
What impacts how much equity I could release?
When you try to release equity using standard loans that require monthly repayments, the lender will decide how much equity you can release based on personal finances, affordability checks and how you have managed repayments in the past by looking at your credit score. If you have excellent credit then you may be allowed to borrow up to 85% of your equity.
But when no monthly repayments are required, your personal finances and credit score are not relevant. As the equity release plan is paid back through the sale of your home, the lender will turn its attention to details about you and your property.
They will consider your age. And they will look at the value of your home, its condition, how well it is built, the surrounding environment and risks such as flooding – among other things.
If the lender believes your property value will increase and will be quick and easy to sell on the property market in the future, you’ll be more likely to access the lender’s maximum loan to value ratio, typically around 60%. But if they think it may be troublesome to sell or believe the property is vulnerable to natural disasters, they may offer you a much lower amount of equity or even reject your equity release application.
Is there a maximum amount I can release?
Although the maximum amount of equity you can release is around 60% for a lifetime mortgage and around 80% for a home reversion scheme, this is based on individual property values and doesn’t tell us if there is a maximum amount of money that can be released. Some lenders do include a maximum amount, but it is rarely stated because most people using equity release schemes would never break this threshold. It may be as high as £500,000 or even £1 million.
Is there a minimum amount I can release?
Most lenders include a minimum amount you need to release as part of an equity release plan. This amount is generally around £10,000. But some providers may ask for a much larger equity release minimum amount to make the agreement worthwhile and more profitable to them.
How much do you pay back on equity release?
There is no way of stating exactly how much you will pay back with an equity release plan. A home reversion plan is a little easier to calculate due to no interest being charged. But it does require you to estimate the value of your property in the future, which is not easy.
The total debt created by a lifetime mortgage is dependent on a number of factors, such as the amount of equity you release, the interest rate agreed and the number of years it lasts. A general rule for thumb is that borrowing around £60,000 with a standard interest rate can double the debt in just over a decade.
Use an equity release calculator
If you want to see how much money you might end up paying back with a lifetime mortgage, an equity release calculator could help.
An equity release calculator uses the amount you want to release with the standard interest rate to show you what your total debt would be over different time periods if you did not make voluntary interest repayments. They are useful but not 100% accurate.
You can usually find an equity release calculator on finance websites and directly on the websites of lifetime mortgage lenders.
Is releasing equity a good idea?
Releasing equity can be an effective way to fund your retirement, but you should always be aware of the overall potential costs and how this will rescue the inheritance you pass on. Most people without children find this a much easier decision to make, but if loved ones could significantly benefit from your home and 100% of its sale proceeds, the decision becomes much harder.
What are the pitfalls of equity release?
The biggest pitfalls of equity release are not using a legitimate lender and not seeking independent financial advice from a specialist in equity release that is also authorised and regulated by the Financial Conduct Authority.
Another pitfall is not revealing any long-term plans to your financial adviser, such as failing to tell them about plans to move home or downsize in the future. This knowledge is essential to finding you the most appropriate scheme.
Will equity release affect my state pension?
Equity release plans do not affect your eligibility to receive a state pension, but depending on how much your savings are bolstered, they can affect your entitlement to receive full pension credits. If you no longer qualify for pension credit payments, this can then affect your entitlement to a council tax reduction.
Moreover, anybody with more than £16,000 savings cannot apply to receive Universal Credit either. Only means-tested benefits can be affected by taking out equity.
What if I have already released equity but want to release more equity?
An equity release provider must have the first charge debt on your property. Thus, if you have already released equity with one lender then you may only be able to release more equity with the same lender. This is more likely to be possible if your property has increased in value since you last released equity.
How much equity can I withdraw? (Quick recap)
The maximum amount of equity you can withdraw as part of an equity release plan is around 60% for lifetime mortgages and up to 80% for home reversion plans. The exact amount of equity you could release will depend on your age and the value of your home – and other details about the property.
Where can I learn more about equity release?
Uncover more key details about equity release schemes at MoneyNerd. Our team is busy writing plenty of new guides about releasing equity as a senior homeowner in the UK and how this can affect other things like state benefits, inheritance tax and much more. Check them out today!