As you near or enter your retirement, you may be more aware of your finances and how they’ll be able to fund your standard of living. One way that you could access extra funds is through equity release, which has increased in popularity in recent years.
The majority of equity release providers only require repayment when the original policyholder passes away or moves into a care home. However, you may decide to move and sell your current property, which will affect your equity release scheme.
Although it’s usually better to try and downsize before you try to access funds from your home with equity release, it is possible to sell your house after releasing equity.
In this guide, we’ll look at the benefits of equity release plans, along with the restrictions that you may face if you choose to sell your house in the future.
What is equity release?
Equity release is only available to homeowners over the age of 55. It allows you to access a percentage of the money attached to your property without having to pay monthly repayments as you would with a traditional loan. You can access the cash in a lump sum, multiple smaller chunks or as a combination of the two.
In 2022, equity release helped households in the UK turn more than £3 billion of property wealth into cash. The most common type of equity release is a mortgage that you won’t have to pay off while you are still alive. However, while this may be a good option for you, it can prove more expensive for your heirs when you pass.
What are the different types of equity release?
There are two types of equity release: lifetime mortgage and home reversion. Below is a breakdown of what you can expect with either option.
This is the more popular option of the two and is available to those aged over 55 years. You can only take out a lifetime mortgage on your property if it is your main residence. With this option, you can take out some of your property’s value in a lump sum or in smaller chunks at a capped or fixed interest rate. Taking out the money in smaller chunks is referred to as a ‘draw down’. If you choose this option, you will only be charged interest on the amount that you have taken rather than the money you are yet to borrow.
Some mortgage lenders will allow you to make repayments, which could be the capital or the interest. However, some won’t expect you to make repayments while you’re alive, which means that the interest will build up and be added to the overall loan. There will also be a cap on how much you can repay (usually 10% of the loan’s value per year). If you don’t pay back the money, the loan and interest will be taken from your estate when you die or enter full-time care.
This option is only available to homeowners aged over 60. Your mortgage provider can pay you a tax-free lump sum in exchange for all or a portion of your house. The amount that they give you will be below market value. Once you sell your house, the profit is split based on the percentage shared between you and the lender. This means that if the property’s value increases, so will the amount the lender gets.
In the instance that you sell a 40% share of your property for £80,000 in a lump sum, this will be below the market value of £160,000. This is largely because the lender won’t get the money back for a good few years. When you eventually pass away, your house could potentially sell for a larger sum. For example, if your property is sold for £500,000, the provider would be entitled to take 40% of the sum, which (in this case) would be £200,000. This means that the lender makes £120,000 after deducting the original £80,000 that they gave to you in a lump sum.
Can I move house with an equity release plan?
Yes, you are able to sell your property and move if you have equity release. The plan that you have, such as a lifetime mortgage, can be repaid at any time (including the interest), which will subsequently end the equity release agreement between you and the provider. Early repayment may result in an additional charge, however, which could be a substantial amount.
You may also be able to transfer the equity release to your new property. Lenders offer different portable equity release schemes and allow you to transfer your debt to your new house. However, they will usually require you to meet certain criteria. For example, the property you are moving to may have to meet the lender’s requirements, such as being a freehold. You may also have to pay back some of the loan and interest if the property you are moving to is worth less than the property you are selling.
If the property or finances don’t meet your lender’s requirements, you may be asked to repay the loan and interest in full. This may also be in addition to early repayment charges.
How does porting equity release work?
You will need to speak with your equity release provider before you start looking at properties, so that know what their criteria are. They may ask you to speak with a specialist equity release adviser or broker so that they can talk you through the requirements for the property that you buy.
Your provider will talk to you about properties that you will need to avoid because they aren’t suitable for the equity release plan. This may include properties such as retirement homes, flats or studios. They may also reject mobile homes or houseboats, as they are usually more difficult to sell, which makes it harder for the provider to reclaim their money.
A broker can help you work through the process of porting the equity release. This means that the plan you opt for should suit your individual circumstances and the requirements of the provider.
It’s a good idea to check the porting requirements when you are looking for an equity release provider, even if you don’t have any plans to move in the near future. After comparing your findings, you will be able to choose a provider that is flexible so that you are able to move in the future if you want to downsize or relocate.
How much does equity release cost?
Equity release can cost a few thousand pounds when you consider the various fees that are associated with signing up for an equity release scheme. The fees will likely vary depending on whether you take out a lifetime mortgage or turn to home reversion, as well as which solicitor you hire.
One of the first fees you will face is solicitors fees, which can cost around £650. It’s a good idea to compare different quotes so that you can compare the fees and services from local solicitors. The fees could cost more or less, especially when considering where you live and the complexity of your estate.
You will also likely have to pay an arrangement fee, which the provider will charge to help them cover set-up costs. This could cost around £600, although this will vary from provider to provider. Some lenders will charge for a valuation, whereas others won’t charge this as an individual fee. You will also have to pay approximately £750 in legal fees, in addition to the advice fees that some providers charge. You may also be charged for transferring funds to your solicitor.
What are the benefits of equity release?
Equity release schemes are an easy way to get a tax-free lump sum of money without increasing your monthly outgoings. Alternatively, you can choose to receive smaller hunks over a period of time or a combination of the two. This flexibility can help you to increase your savings immediately or in controlled portions.
You won’t have to make monthly repayments, although you can opt to make repayments on the interest or loan if you choose to. The money you receive can help you to pay for things that you wouldn’t otherwise be able to afford, such as home improvements or funding an early retirement. You can also reduce the amount of Inheritance Tax that your beneficiaries will have to pay on your estate.
A lifetime mortgage means that you still retain full ownership over your property, which means that you can benefit if the property value increases. A home reversion plan does mean that you have to sell a portion of your property, but it can give you quick access to a larger sum of money.
What are the disadvantages of equity release?
It can be challenging to downsize if you have an equity release plan, as lenders may not let you transfer your debt to a cheaper property. The house or property that you move to must fit the requirements of your equity release provider, which could mean that you cannot move to whatever property you like.
You can repay the loan and interest if you have the funds, but you will likely face early repayment fees. Your provider may charge you an early repayment fee whether you pay back the total amount or only a partial amount.
The money you get from an equity release loan may affect your entitlement to certain means-tested benefits, such as Universal Credit and Council Tax reduction. You will also be unable to take out further loans against your house once you have an equity release.
Although the money from an equity release scheme is tax-free, you will have to pay additional fees, such as the cost of a solicitor and an equity release advisor. This can cost a few thousand pounds, although the price will vary depending on which solicitors and advisors you use.
Should I get an equity release?
There are various factors that will affect whether you can choose an equity release plan. You must be over 55 years old, although the home reversion plan also requires you to be over 60 years old. An equity release works by giving you immediate access to the value of your property, which can result in a quick sum of tax-free cash. However, you will be given an amount that is less than market value, which could negatively impact whoever inherits your estate.
It’s a good idea to avoid an equity release if you are planning to move in the near future. It will restrict where you can move to unless you can find a suitable alternative property that your equity release provider approves of. You will also need to consider how much you want to leave to your family when you pass. Equity release products are designed to last over the course of your lifetime, which means that your heirs will face the repayments after you are gone. If you try to pay the interest and loan off early, you will likely be faced with substantial early repayment charges.
It is possible to sell your house if you have an equity release, although your provider will have a say in the type of property you move to. You probably will have to avoid cheaper properties, as well as certain property types, such as flats and retirement homes. For this reason, it’s a good idea to avoid getting an equity release if you plan to sell your property and downsize in the future.
You should look into the porting equity release requirements before you sign up for a scheme. This will help you make a calculated decision on whether the lifetime mortgage or home reversion is for you or whether you want to wait until you move to a new property.