Equity release – raising money from your home

What is an equity release scheme?

An equity release scheme allows you to release some of the value of your home without having to move.  You can then use this money to fund a more comfortable retirement. 

What should I consider before taking out a scheme?

  • any implications for your entitlement to benefits – although you will not pay tax on the amount you release if you are in receipt of means tested benefits it could affect your entitlement to them.

  • If you die shortly after taking out the plan or if there is high growth in the value of the property, these plans are of relatively poor value. 

  • It will reduce the value you have in your home and hence any inheritance you leave.

  • You will still be responsible for keeping the house in a good state of repair.  If you do not maintain the house then the scheme provider may do so and you would have to pay.

  • If the scheme is taken out while you are single and later you decide to share the home with a partner the scheme may be transferred into joint names.  However, there is usually a charge for this.  They would also need to meet the age requirements.  If the scheme cannot be transferred into joint names then they would have to move out when you die.

  • Before taking out any scheme advice should be sought from an independent financial adviser specialising in this area.  This will ensure the most suitable and competitive scheme is selected.

    Who is eligible to take out a scheme?

    The criteria for eligibility vary between schemes but in general you would need to:

  • Be a homeowner

  • Be over a certain age (normally 55 but often higher)

  • Types of equity release

    There are two main types: home reversion plans and life time mortgages.

    Home reversion plan

    With this type of equity release scheme, you sell a part of your home – or sometime your entire home – to a ‘reversion company.’  But you will not receive the full market value of your home; instead you will get the right to live in your home rent free for the rest of your life.  You will normally receive less than 60% of your home’s market value.  However, depending on the age and value of your home, you may end up receiving less than 35% of the market value.

    When your home is eventually sold, a pro rata share of the proceeds will go to the reversion company.

    Life time mortgages

    This type of equity release scheme is designed for homeowners who wish to release equity from their home but want to retain full ownership.  Under a life time mortgage scheme the property is not sold to the plan provider, instead a loan is taken out against the value of the property.  The money can be taken either as a lump sum, a monthly income, or a combination of the two.  Normally, you don’t make any repayments until the property is sold instead; the interest on the loan is added to the amount owing. 

    If the value of your property does not rise fast enough then the interest owed will erode the equity you own in the property much more quickly.  It is possible that you will be left with no equity in the property to pass on to your beneficiaries.  There are schemes available which allow you to make interest payments over the term.  Life time mortgages are available on fixed or variable interest rates.

    Both of these schemes are covered by the lifetime mortgage regulations and are regulated by the FSA.