Equity Release Success Story

When considering Equity Release you may be concerned about some of the horror stories perpetuated by the mainstream media from yesteryear. Since the early 1990s, the Equity Release market has changed drastically and thankfully, the painful experience of borrowers in the past are firmly historic.

Today, Equity Release is a reputable and regulated industry that allows older borrowers to free up cash tied up in the equity of their property. Equity Release can be used for a variety of purposes and there is now a wealth of Equity Release success stories.

Let’s discover this product in detail and explore what makes an Equity Release success story.

How Does Equity Release Work?

How Equity Release works is quite straightforward. Equity Release is a mortgage product that allows you to release the money from equity you hold in your property.

To qualify for Equity Release you will need to own your property, mortgaged or not, or be looking to purchase a property.

When you release the equity from your property, the provider will put a charge (register a financial interest) on your property.

When you pass away, the property and charge will go into your estate. It will then be down to your next of kin to settle the debt. This can be done by paying off the Equity Release in full from their own funds or from money held in the estate.

In the event they do not have the money to settle the debt and there is no money in the estate to cover the liability, your next of kin can opt to sell the house.

Lifetime Mortgages

There are two types of Equity Release product available in the UK, Home Reversion Plans and Lifetime Mortgages. Of these two, Lifetime Mortgages are the most popular as they typically represent better value.

A Lifetime Mortgage allows you to borrow the money from a lender who backs that borrowing against the equity in the property. Unlike traditional mortgage products there are no mandatory monthly payments (although if you are asking “how is equity release paid back” because you want to repay it, you can choose to pay toward your Equity Release).

Instead of monthly payments, the debt and interest can roll up and becomes due when you pass way or require long term care.

Because the interest on the loan rolls up, you can find the debt increases significantly. In some cases, the total debt amount can reach the total property value, especially if there is property deflation in the market.

If you take an Equity Release product from a provider that is not a member of the Equity Release Council (see below), you could find the debt exceeds your property value.

How Do I Qualify for Equity Release?

To obtain an Equity Release product you must:

• Be aged 55 or over
• Have a property valued £70,000 or more
• Typically have at least 50% equity in the security property

Your property will also need to be in an area the lender deems mortgageable. Finally, the property must be situated in the UK.

What is the Truth About Equity Release?

Today, the truth about Equity Release, for the most part, is that it’s a responsible way for borrowers to free up cash later in life.

However, to say it is perfect or without detractors would be erroneous. There are two main issues when evaluating Equity Release.

The first is the people who have benefitted from the product (the borrowers) do not typically live to see the consequences of their financial decision. By taking Equity Release you will be disinheriting your next of kin to some extent.

Much of the negative publicity generated about Equity Release is centred around sons and daughters who have been disinherited because their parents opted to take Equity Release.

Secondly, there still remain a portion of Equity Release providers who operate without oversight by the Equity Release Council, these firms can offer subpar products that leave debts greater than the property value or force people out of their properties. For that reason, using a regulated Equity Release broker, like Boon Brokers, is an important consideration to ensure that your product has suitable safeguards in place.

The Equity Release Council

In 1991, the Equity Release Council was created to clean up the Equity Release market and ensure transparency for customers.

The Equity Release Council represents over 90% of the Equity Release market including approved lenders and advisers.

They have stipulated guidelines that all members must commit to. The five Equity Release Council rules are:

1. No Negative Equity Guarantee – You will only ever be liable for the value of your property at the time of you passing away or requiring long term care.
2. Penalty Free Overpayments – Allowing you to repay your Equity Release while you are still alive or make contributions to reduce the balance outstanding.
3. Fixed Interest Rates – Your Equity Release will have fixed interest rates or a capped interest rate for variable interest products.
4. Right to Remain in Your Home – A lender will not be able to evict you before you pass away or need long term care.
5. Right to Move to Another Property – If you wish to downsize or move home, the Equity Release will be portable providing the new property meets the lender’s criteria.

If you take an Equity Release product with a provider or adviser who is NOT a member of the Equity Release Council, you will have none of these guarantees.

When Is Equity Release a Good Idea?

There are several situations where Equity Release can be beneficial.

If you are concerned about affording living expenses in later years, an Equity Release product can free up cash and allow you to remain in your home rent free. For those anticipating financial difficulty in retirement, Equity Release can be a wonderful product.

An advantage to Equity Release in this circumstance is you can opt to take the payment in full or as regular payments over time with most Lifetime Mortgage providers.

Equity Release can be used in other ways as well. For some, the option to go on the holiday of a lifetime or buy a new car is important. You can also purchase a second home with the amount you release providing the amount released is sufficient.

For those concerned about disinheritance, you can give the released payment to your next of kin to be used as a deposit on their first property – or if they own a property, help them pay off their mortgage.

Equity Release is a product that benefits some borrowers in some situations and is not a product that is suitable for everyone. Your Equity Release adviser will be able to answer “when is equity release a good idea” for you and signpost other options if need be.

Ways to Get a Mortgage in Old Age

A Lifetime Mortgage is not the only option available to you if you are older and require a mortgage.

Home Reversion plans are an Equity Release alternative where the provider buys the equity upfront. Unfortunately, Home Reversion Plans offer much less than market value and are considered by most to represent poor value for money.

There are also Retirement Interest Only mortgages available to some borrowers. These products differ because you will need to pass a lenders’ mortgage criteria and make monthly interest payments on the loan

Difference Between Home Reversion Plans and Lifetime Mortgages

Both Home Reversion Plans and Lifetime Mortgages are specialised mortgage products.

Home Reversion Plans tend to have a higher minimum age of 65.

Both products allow you to live in your property until you die or require long term care.

Home Reversion Plans have less oversight, and the Equity Release Council focuses predominantly on Lifetime Mortgages.

Home Reversion Plans have no interest as the money is paid directly to you in return for the equity initially. Because you are able to reside in the property, you will still be subject to mortgage contract.

Home Reversion Plans make their profit by vastly undervaluing the equity. For example, if you wish to release equity using one, you may only achieve 20% of the value of the equity being released.

Are Equity Release Payments Taxable?

No, in most circumstances the amount you receive from your Equity Release will be tax free.

There are rare exceptions to this rule, for example if you are a high net worth individual with significant monthly income and opt to take your Equity Release in regular payments. In these instances, you may have an income tax liability.

It is best to seek specialist tax advice if you are concerned about your Equity Release payment being taxable.

For the vast majority of borrowers using a Lifetime Mortgage, your payment will not be subject to taxation.

Speak to an Equity Release Specialist

When deciding if Equity Release is right for your personal situation, you should seek advice in the first instance.

A Lifetime Mortgage adviser will sit down with you and any interested parties to answer any questions you have, explain how equity release works, and discover more about your financial situation and goals. Once they understand your needs in totality, they will make a tailormade recommendation.

You should also find a Lifetime Mortgage adviser that is fully regulated and a member of the Equity Release Council.

Boon Brokers is a member of the Equity Release Council and fully authorised to provide advice on Equity Release.

Boon Brokers is a Whole of Market Mortgage, Insurance and Equity Release Broker. Boon Brokers provides fee free Equity Release advice.

Contact Boon Brokers to book your Equity Release consultation today.