Equity release policies give homeowners aged 55 or older the option of freeing up capital from their properties without needing to sell up.
Whether you want funds to travel, help your children onto the property ladder or make some home improvements, equity release may be an option you are considering. However, you must always take independent legal advice before signing an agreement to ensure that you fully understand the implications.
How does equity release work?
Equity release is a loan policy that allows you to free some of the capital in your property without the need to repay it immediately. Generally, repayment occurs when you eventually leave your home, for example, to move into care or after your death.
Some agreements have the flexibility to allow you to move home and transfer the equity release policy, although there may be a premium for this, as well as legal charges and restrictions on the property you can move to.
Policies are usually available for those aged 55 or older and lenders also have restrictions in respect of the sorts of property they will lend against, including with regard to age, value and condition. They will not usually lend against a retirement property as they do not take on properties with restrictions that mean they cannot be put on the open market.
The two types of equity release policy are the lifetime mortgage and the home reversion policy.
Lifetime mortgages
Most equity release policies are lifetime mortgages. The lender will take a charge over your property and provide you with a lump sum or, in some cases, you may be able to have a monthly income or a draw-down facility which will allow you to withdraw funds as you need them.
You may have the option to repay the interest on the loan each month to stop it being added the outstanding balance. Alternatively, the interest will accrue and ultimately be repayable along with the capital.
Home reversion policies
A home reversion policy works by selling part or all of your property to the equity release company. The amount you can borrow will usually be between 20% and 60% of the value of your property. The lender will give you a sum that is below the market value of the portion that they are buying to cover the risk to them. For example, if they have half of your home, you will receive a sum of money that is below 50% of the current market value. When the property is eventually sold, the lender will receive 50% of the sale price. They will also charge administration expenses.
This type of policy is normally reserved for older borrowers aged 70 or over, as lenders will not release as much for younger applicants because of the length of time they will need to wait to be repaid.
If you take out an equity release policy, you will still be liable for all of the outgoings relating to your home.
Legal advice on equity release
It is a legal requirement that you have independent legal advice before taking out an equity release policy. This is because of the wide-ranging implications of this type of contract. Advice generally includes a discussion of:
- How interest will be dealt with
- What the loan means for your estate and your beneficiaries
- How and when the loan will be repaid and how the costs of this will be calculated
- Implications for your Will
- How the equity release process works
- The conditions contained in your equity release offer
- The fees the lender will be charging
- Tax implications
- The effect a lump sum could have on your entitlement to benefits
- What you are required to do, such as insuring the property, paying outgoings and keeping up with maintenance issues
- Whether you can move house if you wish to and any restrictions or charges in respect of this
Contact us
If you would like to speak to one of our expert property lawyers, ring us on 0333 3055 189 or email us at info@lpropertylawyers.co.uk
