What is an Equity Release Plan?
Sometimes a phrase comes along that presses the marketing chaps buttons. “Equity Release” is one of those in my opinion. It’s short and snappy. It uses the word “Equity”, long since associated with wealth, value and the sum of an individuals worth. Another meaning is that of equality and even fairness. It derives from the Latin “aequus” meaning ‘equal’. Add the word “Release” which immediately conjures up positive images of freedom and the abandoning of shackles, and the marketing boys are cock-a-hoop. But just what actually is it? Well, as with many things, the actuality can appear a bit mundane when its had a bit of a verbosity makeover, though there is a lot more to it that the generally perceived equity release interest only loan.
“Equity Release” is in fact nothing more than a type of mortgage. It’s a loan against property. It is as simple as that.
There are a number of features that make this type of mortgage an “Equity Release” plan, and the purpose of this blog is to demystify these features. The term itself is a general or umbrella term used to cover plans that allow an older home-owner to use the value of their property to help them with their income or capital requirements.
The most common type is a “Lifetime Mortgage” which is a loan secured against the property, but unlike standard mortgages, the loan typically does not have to be repaid until the borrower dies or moves into permanent long term residential care. The original loan plus interest which has been added during the term of the loan is then repaid from the sale of the property. There are several variations of this style of Equity Release that can allow further borrowing or monthly repayments during the life of the loan.
A different type of Equity Release is the “Home Reversion Scheme”. This type of scheme involves actually selling all or part of the property to the scheme provider. The person taking out the scheme is then given the right to continue living in the property for the rest of their life. This blog will only look at the Lifetime Mortgage style of plan as it is the most common.
Video courtesy of Dennis Perry at The Right Equity Release.
At What Age Do You Become an “Older Home-Owner”?
Typically, these plans are available to people age 55 and above. If you are entering the arrangement as a couple then the youngest must be 55 or above. The amount you can borrow is shown as a percentage of the value of the house. Each plan provider is slightly different, but the basic concept is that the percentage you can borrow increases as you get older. Such plans are designed to be repaid on death, or taking permanent residence in a care home. With this in mind, someone entering an Equity Release arrangement at age 55 should understand that if they live to 100, then the plan will last or 45 years. Something to think about considering the mortgage that was probably used to but the property in the first place was over a 25 year term!
Are all Properties Eligible?
Okay, I’ll expand on that a bit more. Not all properties are eligible as security for these plans. Here are the most common rules that apply as of now:
- The property must be owned by you and be in the UK. This property must be your main residence and occupied by you. If you are a couple, but the property is in just one name, then it will need to be transferred into both names before proceeding
- If the property is leasehold, then the remaining term of the lease must be over a certain number of years. Different providers have different rules.
- Just like any mortgage, the proposed lender will have their own criteria regarding the construction, age and minimum value for the property. If you have a 400 year old, cob built house worth £80,000, you are going to find that the market is somewhat smaller than if you have a 50 year old standard built property worth £300,000.
- You will need to use the money you borrow or “release” to pay off any existing mortgage or loan secured on the property immediately. You are then free to use whatever money is left over for your other financial needs.
- Your property must be in a reasonable condition.
Are Equity Release Plans regulated?
Advisers for this product have to be qualified, and in addition to taking exams they have to show that their knowledge is up to date and of a certain standard. Like all mortgage related products, equity release products, providers and advisers are regulated by The Financial Conduct Authority (FCA).
In the FCA’s own words, taken from its own website, a purpose of the FCA is to ensure that “Financial markets need to be honest, fair and effective so that consumers get a fair deal”. In the event of any complaint you may have, it is the FCA you can turn to for help if you are unable to reach a satisfactory conclusion with the company you are in dispute with.
Although not a regulator, The Equity Release Council represents over 300 firms and individuals working within the equity release sector. These include providers, advisers, solicitors and intermediaries amongst others. Members of the ERC agree to a Statement of Principles which highlight a number of safeguards for consumers.
You are well advised to seek out the best qualified and experienced people to help you make your decision!
This blog is not in any way meant to persuade you for or against taking an Equity Release plan. The purpose, as with everything on the site, is to make you think about the questions you need to ask in order to make the right decisions for you and your family. Over the next few blog posts, I plan to write about what questions you need to ask, to yourself, your family and to professionals working in the Equity Release market
If you have any questions about Equity Release, contact Dennis direct by completing the form below.