Equity release is a method of releasing some of the value of one’s home into tax-free cash without having to move. It is a long-term loan that people can use once they turn 55. This could be done for various reasons, such as a special occasion, home renovations, paying off debt, or padding one’s retirement cushion. The borrowed money and interest are repaid in full, usually from the sale of the home in the future.

Types of equity release

1. Lifetime mortgage
Possibly the most common type of equity release, these loans are secured against the value of one’s home and do not need to be repaid until the borrower passes away or moves into residential care.

Currently, the lifetime mortgage interest rates start from 4.16% and go up to 6.94% MER (monthly equivalent rate). The final rate depends on factors such as the property’s location, construction, type, and intended use, as well as the total loan amount borrowed against the value of the property (loan-to-value ratio). Most organizations have a minimum borrowing limit of £10,000-15,000. A lifetime mortgage plan can be drawn in two forms—lump sum and drawdown.

• Lump sum: Here, a one-time lump sum amount is borrowed from the plan. The interest and loan repayments are covered by the sale of the property.
• Drawdown: With these types of plans, an initial sum is withdrawn. The rest of the principal amount is used to create a reserve of equity that one can use in the future. Interest is only charged when the amount is withdrawn, reducing interest payments.

2. Home reversion plan
With this form of equity release, the homeowner sells their home (or a part of it) while they continue to live in it. Once the homeowner moves into permanent residential care or in the event of any unfortunate incident, the reversion company sells the house for profit. It is important to note that these companies typically do not pay the market rate, which can cause issues with estate planning.

Eligibility for equity release
The standards for equity release plans and providers are set by a trading body called the Equity Release Council (ERC). This outlines certain eligibility requirements for availing of these plans, such as age, home ownership, and even loan requirements.

• Age: When applying for a lifetime equity release program, the borrower must be at least 55 years old. In the case of joint applications, both individuals must be at least 55 years of age. Home reversion plans are usually available from the age of 65.
• Homeownership: The borrower can only take this loan against a property in the country where they live. The property must also be reasonably maintained and over a set value (worth £75,000 or more). Additionally, any outstanding mortgage will have to be paid off before or at the time of taking the equity release.
• Family: Equity release can become a complicated affair when one has dependents living with them. To continue living in the home, one’s dependents may be asked to sign a waiver saying that they understand that they do not have the right to continue inhabiting the space once the borrower moves into permanent care or in the event of an unfortunate incident. It’s best to seek legal assistance in this regard before signing for an equity release plan.

Calculating equity release
Navigating the domain of equity release can be challenging. To simplify the process, many companies have created equity release calculators. As the name suggests, these tools provide homeowners with an approximate estimate of the total amount of equity they may be able to release (in a lifetime mortgage plan). This estimate depends on the lending criteria, the condition of the property, and the lifetime mortgage one chooses.

Based on the entered information, the calculator also offers insights regarding the applicable interest rate, changes to the interest amount depending on the amount borrowed, and total interest charged in a year and over a lifetime (running up to 15 years).

Finding an equity release calculator
Equity release calculators can easily be found via a simple browser search. Although these calculators are often available free of charge, some of them may ask for a significant amount of personal information. It’s best to look for an equity release calculator that does not require one to share too many personal details. There are various equity release companies that offer calculators without asking intrusive personal questions. But, it is important to note that such equity release calculators do not take into account certain expenses such as lender fees, brokerage fees, valuation fees, and/or solicitor fees.

Equity release is a major financial step that must be considered seriously. Martin Lewis, a financial expert, states that equity release can be a good tool for those who require the funds and are not concerned with the impact on the inheritance they leave. That being said, he also emphasizes that individuals should take ample time to research equity release products thoroughly and make sound financial decisions. Since this can be an expensive process, it may be better to consider other ideas like downsizing or borrowing from other sources before putting one’s home on the line. The FCA (Financial Conduct Authority) also mandates that individuals receive professional financial advice before signing up for an equity release plan.