Equity release might afford those who would otherwise have to move the opportunity to stay in the property that they love for longer, writes Louisa Fletcher
In years gone by, it’s probably fair to say that equity release didn’t have the best reputation.
Before the sector was as strictly policed as it is now, it wasn’t uncommon to hear of stories circulated in the press about vulnerable elderly people who had lost their homes, having signed contracts with unscrupulous, unregulated providers which, it was argued in some cases, hadn’t been clearly explained to them and were the result of high-pressure selling tactics.
While any such practises have now firmly been relegated to the past as a result of regulation of the sector, many people are still understandably wary of equity release. For some adult children, the mere mention of any such plans by elderly parents can ring alarm bells.
There’s no place like home
A ‘perfect storm’ of a rapidly growing aging population, rising house prices, increasing costs of moving, and lack of suitable properties for those wanting to downsize, compounded by a difficult sales market in some parts of the country making it harder to sell and recent changes to state pensions, have all contributed to a huge growth in later life lending.
Latest figures from the Equity Release Council suggest that sector has grown almost fourfold in the UK over the last decade, with the annual value realised from properties using equity release schemes increasing from £945.97 million in 2009 to £3.92 billion in 2019.*
But one could also suggest that there is also a more human element involved too. For many older people, their home is likely to hold many special memories and significant attachments. Research suggests that those aged 50 plus identify a greater sense of belonging to their neighbourhood than younger age groups, which increases beyond the age of 65. This importance of community as well as any emotional connection to their home means that for many, selling up and moving out to raise money is the last resort.
What is equity release?
Equity release provides eligible homeowners of 55 and over with the ability to draw cash from the value of their home, without selling it.
The equity release sector has been governed by the Financial Conduct Authority (FCA) since 2004, and all providers must also sign up to the Financial Ombudsman Service. As a consequence, all lenders, brokers and advisers in the sector have to be regulated, much in the same way as mortgage lenders and brokers are. There is also an industry body, the equity release Council, which is a voluntary scheme that has its own strict code of conduct, offering further peace of mind to consumers.
There are two types of equity release product available; Home Reversion plans and Lifetime Mortgages.
Home Reversion plans allow the homeowner to sell some or all of their property to a home reversion provider. In return, they receive either a lump sum or regular payment from the provider and are able to remain living in the property for the rest of their life or until they move into long-term care.
However, these schemes mean that occupiers have to abide by the terms and conditions in the contract, which may restrict what they can and can’t do to the property and how they may use it. Also, not all Home Reversion plans offer a ‘no negative equity guarantee’.
This is a very important element to consider, as having this included in the contract means that at the point the property is sold, and all estate agency and solicitors fees have been paid, even if there isn’t enough left to repay the outstanding loan and interest owed to the home reversion plan provider, the borrower or their estate aren’t liable to pay any shortfall.
The second type of equity release product available is a Lifetime Mortgage. These operate on a similar basis to a normal residential re-mortgage. The lender assesses the property the borrower wishes to raise funds against and assesses their criteria for suitability. The amount lenders will allow applicants to borrow using a Lifetime Mortgage varies, depending on their individual circumstances, however generally the absolute maximum is 60%.
The funds borrowed can then either be drawn down in one lump sum, or in several stages over a longer period of time. The latter option generally means less interest is payable overall, as interest is accrued only on the amount advanced. In either case, the loan amount and any accrued interest is repayable either when the borrower dies or moves into long-term care.
Sometimes clients who have an income in retirement opt to repay the interest on the borrowed amount from their pension or investment, meaning that only the lump sum borrowed is outstanding at the end of the mortgage term. Alternatively, the borrower can let the interest ‘roll up’, which means that the amount borrowed together with the interest payable both accrue over the lifetime of the loan, and there are no monthly payments. This does mean that the amount repayable increases substantially.
As with Home Reversion Plans, some Lifetime Mortgage providers don’t offer a ‘no negative equity’ guarantee. However, all member providers of the Equity Release Council do include this clause in their products, making it easier to identify those who don’t. Another key point is that — similar to a normal residential mortgage — if the borrower decides that they’d like to pay their lifetime mortgage off early, they may have to pay early repayment charges.
As with other types of secured loans, interest rates can vary significantly between products and lenders, meaning that an essential part of the financial advice taken is the provision of an overall cost calculation and illustration. This enables the borrower to understand how much they are paying overall for the product that’s being recommended to them.
To get an idea on how much money can be released with a lifetime mortgage, try Aviva’s equity release calculator.
The effect on tax
It’s also important to remember that equity release products do create the potential for tax implications. Releasing equity can also change the borrower’s tax position and potentially alter eligibility for welfare benefits, which is why all equity release advisers have to complete a strictly regulated process, including a clear explanation of the impact on these areas to any potential applicants.
What about inheritance?
One particular subject that can create tension between parents considering equity release and any family currently named as beneficiaries in their will, is that these plans do of course reduce any inheritance. It could be argued that selling a home to release capital to either downsize or pay for private care would have the same outcome. Still, this is a topic that requires careful navigation to ensure everyone is aware of and comfortable with the final plan that’s agreed.
Some products offer the ability to ringfence an amount that can be left, which can help to ease concerns, but it’s still an area that needs to be sensitively handled. Many lenders and brokers actively encourage borrowers to bring their family members to meetings with financial advisers, so that they can join in conversations and hear first-hand about the details of the policy, the options available and have the opportunity to ask any questions themselves.
Whilst equity release may not be appropriate in every situation, it can potentially offer a solution that can improve the borrower’s quality of life. Whether that means funding private personal care, bolstering a state pension, or meeting the cost of repairs and improvements to the property in order to make it more accessible, approached responsibly and cautiously, equity release might afford those who would otherwise have to move the opportunity to stay in the property that they love for longer.