Equity Release

There are two products, and they are not variations of the same thing.

Lifetime mortgage

This is the form almost everyone uses. It is a loan secured against your home. You keep full ownership, you continue to live there for life or until you go into long term care, and the loan plus the interest is repaid when the property is sold. You can take a single lump sum, or set up a drawdown facility where you take an initial amount and draw further sums later, with interest accruing only on what you have taken. Drawdown usually costs less for people who do not need all the money at once.

Home reversion

Here you sell a share of your property to a provider and keep the right to live in it rent free for life. You receive well below market value for that share, because the provider waits an unknown number of years to be repaid. There is no interest, and the provider’s share of the eventual sale proceeds is fixed as a percentage. Very few of these are written now.

This is the part that must be understood properly. On a lifetime mortgage with no monthly payments, interest is added to the balance and then charged on the new, larger balance. The debt compounds.

Take 60,000 released at 6.5% a year with nothing paid. After ten years the balance is around 112,000. After twenty years it is around 211,000. The rate is fixed for life on Equity Release Council plans, so the figures are predictable, but the growth is not linear and the effect over a long retirement is substantial.

There are ways to control it. Most plans let you make voluntary payments, commonly up to 10% of the amount borrowed each year, with no early repayment charge, and paying just the interest each month stops the balance growing at all. Any illustration we produce shows the projected balance at intervals.

Plans meeting Equity Release Council standards carry guarantees, and we would not recommend one that does not.

• A no negative equity guarantee, which means your estate can never owe more than the property sells for, however long the plan runs
• The right to remain in the property for life or until you move into long term care
• A rate that is fixed for life, or if variable, capped for the life of the plan
• The right to move the plan to another suitable property
• The right to make penalty free voluntary payments within the plan’s limits
• Independent legal advice from your own solicitor, who must meet you in person

Cash sitting in your bank account counts as capital for means tested benefits, so pension credit, council tax reduction and any local authority support you receive may be reduced or stopped. Releasing a large lump sum you do not immediately need is the most common way this goes wrong, and drawing smaller amounts as required usually avoids it.

The loan and its accrued interest are repaid from your estate when the property is sold, so there will be less to pass on. Some plans allow you to ring fence a fixed percentage of the property value as an inheritance guarantee, at the cost of a smaller amount released. This is worth discussing with your family in the room, and we are happy to include them.

Deliberately reducing assets to qualify for local authority care funding can be treated as deprivation of assets, so if care costs are the reason you are considering this, say so at the outset.

Equity release is not the only way to raise money in later life, and we must consider the alternatives. Those might include a retirement interest only mortgage, where you pay the interest monthly and the capital is repaid on sale, a standard mortgage running into retirement if your income supports it, downsizing, or help from family. It is also worth checking you are claiming everything you are entitled to, since attendance allowance and pension credit go unclaimed by a great many people who qualify.

Advice is mandatory for equity release. You cannot buy a plan on a non advised basis, and the adviser must hold a specialist later life lending qualification on top of the standard mortgage qualification. You will also need your own solicitor. It is a deliberately slow process, usually six to ten weeks.