An explanation of how the different types of equity release work
How does Equity Release work? There are three methods of extracting some of the wealth that your home represents:
- Cash Release Plans
- Home Reversion Plans
- Retirement interest only mortgages
These schemes allow the over 60s (in some cases over 55s) to release the equity in their homes to augment their income. There are no restrictions on how the capital raised is used. For example, you may choose to;
- Augment pension income;
- Repay outstanding debt;
- Fund long-term care;
- Make gifts, with a view to reducing Inheritance Tax liability over the longer term;
- Enjoy holidays and recreational pursuits;
Cash Release Plans (sometimes referred to as a Roll up Mortgage)
A loan is taken out on the value of your home. The loan is secured on the property and provides additional monies (lump sum, regular income, or combination) that you can spend or invest as you choose. There are no monthly repayments to be made on the loan as the interest due rolls up each year and is added to the loan amount.
Repayment of the loan and rolled up interest is deferred until your home is sold, usually when you move into long term care, or on death. Some plans oﬀer the additional option of a no-negative equity guarantee. The amount that can be released is typically linked to the borrower’s age.
Home Reversion Plans
With this plan you agree to sell a specific percentage of your home to a reversion company, for a fixed amount. The plan provider becomes the owner (or joint owner) of the property, but the plan-holder retains the right to live in the property for the rest of their lifetime.
The cash sum that the plan-holder receives from the sale is based on both age and the proportion of the property that is sold. however, even if 100% of the reversionary interest is sold, the capital sum received will only represent a proportion of the current value of the house, because of continuing right to live there. The plan- holder is still responsible for the upkeep of the property.
If only a share in the property is sold, it is possible to sell another share in the property at a later time, taking advantage if any increase in property values. The payment to the plan-holder is not a loan. There is no interest or loan to repay. instead, when your home is sold the reversion company receives the same proportion of the sales proceeds.
When the last surviving plan-holder dies, the property is sold. if the policy provider took full ownership, it takes the whole of the sale proceeds (including any appreciation in the value of the property). If the policy provider took only a share of the property, it takes that share plus any appreciation in value of the share, the remainder passing to the plan-holders estate. If house prices have risen the company will benefit from this. Home Reversion Plans are regulated by the Financial Conduct Authority.
Retirement Interest Only Mortgages
With this option you borrow a sum of money against your home and repay the interest each month. Some products will allow you to repay some of the capital as well. The loan is repaid either when the mortgage term comes to an end or when you sell the home, go in to care or die. You will also have to pass an affordability check in order to prove that you can afford the interest payments. The amount you can borrow can be up to 60% of the property.
Equity Release Council Code Of Practice
The members of the Equity Release Council agree to provide fair, simple and complete presentation of their plans. The benefits, obligations, variables and limitations must be clearly set out in their literature, including costs which the applicant has to bear in setting up the scheme, the position on moving, the tax situation and the eﬀect of changes in house values.
The client’s legal work will always be performed by the solicitor of his or her choice. In all cases, prior to the completion of the plan the solicitor will be provided with full details of the benefits the clients will receive. The solicitor will be required to sign a certificate to the eﬀect that the scheme has been explained to the client.
The Equity Release Council certificate will clearly state the main cost to the householder’s assets and estate e.g. the loan amount repayable on death, whether part or all of the property is being sold.
Why choose Bread and Butter Advice?
We are specialists in advising the older client, qualified to the highest levels and passionate about giving correct advice and help. Contact Bread and Butter Advice for a no obligation telephone appointment at our expense, to discuss whether a lifetime mortgage is right for you. Our Equity Release FAQ provides more information about Equity Release.
This guide contains information about Lifetime Mortgages. To understand the features and risks ask for a personal illustration.
This guide is designed for general information only. Individual specific advice should be taken by all individuals from a financial adviser. No responsibility for loss occasioned as a result of any person acting or refraining from acting can be accepted by Bread and Butter Advice. Whilst Bread and Butter Advice has endeavoured to ensure that all the information supplied in the document is factually correct, it accepts no responsibility for the content.
**Your house may be at risk of repossession if you do not keep up with loan or mortgage repayments.