Equity release

Equity explained in the simplest way is the value of your home minus any mortgages or debt secured on it. Equity release is a way of accessing the value in your home and transforming it into tax-free cash. It’s possible to do this in two ways:

• With a Lifetime Mortgage, the most common equity release product.
• Or a home reversion plan.

A Lifetime Mortgage involves borrowing money from your home, whereas a home reversion plan involves selling some or all of your home to a provider. Royal London Equity Release Advisers will not advise on home reversion plans as they believe they offer poor value for homeowners.

Depending on which product you choose, you may be able to borrow money as a lump sum, in smaller amounts over time, or as regular ongoing amounts.

If you choose to release equity with a Lifetime Mortgage, then interest will be charged on your loan over time. It will be what is known as compound interest, meaning the interest is charged on the new amount each time, instead of the original loan value. In this way, the amount you owe may increase quickly.

With all equity release products advised on by Royal London Equity Release Advisers, there is no worry about owing more than the value of your home. They will come with a ‘no-negative equity guarantee’, meaning if you ever owe more than your home is worth, the excess will be written off by the lender.

Equity release interest rates are slightly different to those available with conventional mortgage borrowing, and will be determined based on factors like how much you borrow and the value of your home. Rates can range from 6-9%, and the best way to find out what may be available to you is to speak with Royal London Equity Release Advisers. They will create a personal illustration for you, demonstrating exactly how the interest rate will affect the cost of releasing equity and what the impact of making optional payments will be.

If you were to consider a home reversion plan, there are no interest charges to consider as you will be selling your home instead of borrowing against it. However, you will not be offered its market value, so you will be receiving less than it is worth. This is why Royal London Equity Release Advisers will not advise on them.

Equity release products will allow you to make flexible payments. All payments are entirely optional, so you can choose to stop making them at any time. This can be particularly useful for planning around life events like retirement, when your budgets may change. Your options could be to:

Pay the interest monthly

You might want to consider making monthly payments to clear the interest, keeping the amount you owe the same as the amount that you borrowed. Some homeowners do this for a set number of years, reducing or stopping their payments as they get older.

Make ad hoc payments

Instead of paying the interest monthly, you might want to consider paying lump sums when you can. For many lenders, you could pay up to 10% of the initial amount borrowed each year without early repayment charges. This could reduce the amount that you owe in the future.

Make no payments

As payments are entirely optional, you could choose to make none at all. While this could be the most expensive option in the long-term, it provides flexibility for those interested in using their money elsewhere.

Like all financial products, there will be pros and cons to consider before making your choice. Read more on this in the guide to whether equity release is a good idea.

Some of the impacts that you should consider are that:

• The value of your estate will be reduced, potentially affecting your future inheritance plans.
• Receiving a tax-free cash sum could affect your entitlement to means-tested benefits.
• There may be early repayment charges if you choose to repay your equity release early. Royal London Equity Release Advisers can help to explore the potential costs in a free initial consultation.

There are features available to help mitigate these impacts. For example, some lenders can offer inheritance protection, helping to guarantee a lump sum for your loved ones. It works by ringfencing some of your home’s value. If you had a home worth £250,000, and chose to ringfence £50,000, then the calculation would be completed based on a value of £200,000. The maximum amount of equity available to you would be reduced, however.