I'm a property expert that still remembers the days when having broadband was a selling point! My articles cover issues that homesellers face in the UK and answer the questions we're all asking. I've bought and sold properties and helped others do the same, so my writing comes from years of experience.
Read Full Bio >To find out more about equity release, I’d recommend that you take a look at one of our other articles: Is equity release a viable option? are there any equity release horror stories?. To re-cap, equity release allows individuals aged 55 and over to release money from the property in which they live, whilst still residing in their property, without having to make any monthly repayments.
Not everybody is eligible for equity release. As well as age restrictions, you must own a UK property that is your main residence, and it must be in a reasonable condition. Also, if you have a house repayment or secured loan on your home, you could still get equity release, but it will depend upon the value of your home and the amount that is currently outstanding. Any outstanding amount will need to be repaid at the same time as taking equity release.
There are two different equity release options:
Lifetime house repayments
A lifetime house repayment is a common type of equity release in the UK. It allows you to take out a house repayment secured on your property, whilst still retaining ownership of your home, as long as the property serves as your main residence. Upon passing, or moving into long-term residential care, the house sells in probate and the money made will go towards the house repayments payment. If you choose a lifetime house repayment, you have the option of making payments on the house repayments or allowing interest payments to be collected as part of the debt.
Home reversion
This option means you sell part of your house to a reversion provider so that you can still live in the property. The reversion provider will either give you a lump sum or periodic payments for the part of the property that has been sold. You can continue living in the property without having to pay rent on the part of the home that’s been sold. However, you must continue to maintain and insure that part of the house. There is also the option of using a tactic called ‘ring-fencing’. In this situation, you can secure part of the property for inheritance, whilst selling the rest of the property.
Consequences of equity release
Although equity release sounds like a plan to get your hands on cash quickly, it does come with several long-term implications. It’s important you consider the perils of equity release before you decide to commit.
For example:
- Equity release reduces the value of your estate and so the amount that will go to the people named in your will is also going to be reduced
- A home reversion plan will mean that a reversion company will own all or a share of your home, so it won’t fully be yours
- Using equity release may reduce your entitlement to state benefits, either now or in the future
- If you currently have care in your home that is either fully or partially funded by the local council, they are likely to start to charge you, or ask you to pay more for the services you receive
Who regulates equity release?
The Equity Release Council ‘represents the equity release sector and exists to promote high standards of conduct and practice in the provision of and advice on equity release which have consumer safeguards at its heart.’ The Council is a consumer centric trade body that is focused on key themes of
- representative lobbying
- leading and setting high standards for consumers
- awareness of how housing wealth can help with financial challenges
How do I sell a home with equity release?
Before you agree to an equity release plan, always check the details about whether you are able to move the loan to a new property (in case you need to do this in the future). Another aspect to check is whether there is a ‘no negative equity’ guarantee. Without this, your beneficiaries could find that there is still money to be owed, even after your property has been sold.
A reputable lender should permit you to move to what they see is a ‘suitable alternative property’. This means that they will not lose out financially by you moving to a new property. In the same way that your original property was assessed to check whether or not it was suitable for you to secure an equity release plan, the new property will also be assessed for suitability. If the equity release provider is happy with your choice of new home, you will be allowed to transfer the loan to the new property. This is known as ‘porting’.
How does ‘porting’ work for equity release?
Before you start to look for your new home, speak to your equity release provider about the rules they have in place for a ‘suitable alternative property’. In most cases, they will refer you to a specialist equity release adviser or broker that will explain the types of properties accepted for porting. They should also explain the type of properties you are not able to buy under the terms of the equity release plan, so that you’re aware of the ones to avoid.
Unacceptable properties
The types of properties that are usually unacceptable for equity release providers include specialist retirement properties, static and mobile homes, guest houses, bed and breakfast establishments, and house boats. This is because they do not want to take on a property that may be difficult to sell in the future.
If you decide to use a broker, as well as explaining which types of properties are going to be acceptable to your equity release provider, they will also take care of most of the administration for setting-up the porting. This will make the process much easier for you. Also, a broker will be able to explain how moving house will affect your equity release plan.
What are the alternatives to porting?
When you consult an equity release adviser, they may explain that you’re your particular situation, porting may not the best option. In some cases, they might recommend that you repay the lifetime mortgage with the proceeds of the sale of the house and take out a different plan, with a lower interest rate.
You could find that there are more equity release products available than when you originally took out your plan out, and that the new terms and details suit your circumstances. This is why it’s best to be honest and open because a broker will be able to find the best solution based on your existing loan terms and search the market.
If you decide to repay your loan and take out a new equity release plan, it will generally take a longer than porting with your existing provider. You will go through the whole application process again with a new equity release provider, as well as the work involved in repaying and settling your existing loan. Your broker will often perform a lot of the administration work, but it will still take longer to arrange than porting.
One of the key factors in deciding whether to repay your existing loan or switch to a new one is if there’s an early repayment charge to pay. If there is an early repayment charge in place, moving to a new plan might not be beneficial for you financially. A broker will be able to calculate this and explain different scenarios.
Equity release plans
As previously mentioned, there are two main types of equity release plans; lifetime house repayments and reversion plans.
The lifetime repayments enable you to release some of your home’s value and interest on the sum you have released adds up over time and is usually repaid – along with the sum itself – when you pass away or enter long-term residential care.
Some products can be very flexible and may have the ability for you to receive a regular monthly income from your property wealth, to make regular interest repayments during the life of the loan, and to allow downsizing so you can move in the future – penalty free – if you choose.
If there’s a chance you might want to downsize in the future and you’ve yet to release equity, you may want to look at a plan that offers downsizing protection. This is something that can be taken out with some lifetime mortgages.
Downsizing
The process of ‘downsizing’ is very common for people later in life, especially if they have lived in a large family home with multiple bedrooms, but now need to move to a smaller property. This could be for any number of reasons, such as reducing the amount of housework, gardening and property maintenance. People sometimes downsize into a property that is more suitable for their changing requirements. They may consider moving into a bungalow, for example, to remove the danger of getting up and down stairs as they get older.
Another reason for downsizing is to reduce the amount spent on utility bills. Smaller properties generally consume less gas and electricity than larger properties.
However, according to ThisIsMoney, only 14% of those aged from 55 to 64 want to downsize, with the top reason for staying put as being ‘too attached’ to their home. Geographically, Londoners were the most likely to want to downsize with 39% having plans to do so in their retirement. This compared to 16% of residents in the South-East.
Downsizing protection
If you are in the group of wanting to downsize, downsizing protection allows you to downsize your property and repay your equity release plan. By doing this, your beneficiaries will not have to arrange for the loan to get paid off when you pass away.
Many equity release plans now offer downsizing protection, which gives you the flexibility to downsize your property at a time that suits you if you decide this is the best option for you later in life.
Each lender has different criteria for their downsizing protection so it’s important to fully understand the terms and conditions before going ahead. For example, some lenders will only allow you to move home at least five years after the start of your lifetime mortgage.
When you have a chat with your equity release plan provider about downsizing, they will arrange for your new property to be valued by an independent valuer. After this, they will make the decision about whether or not the new property is suitable for you to transfer the lifetime mortgage.
If the property is not acceptable (because as previously mentioned, it doesn’t meet their criteria and could be difficult for them to sell), the lender will usually allow you to sell your property to repay the lifetime mortgage loan. In this situation, you would not usually be required to pay the early repayment charge, but it is best to check first.
Equity release plans can be a right for some people later in life, but they are not suitable for everyone. It all depends upon your personal situation so speak in detail with a broker and check that the plan you choose will not restrict you from selling your property at a later date, as well as ascertaining the fees that are involved.
Any questions?
We hope this article has helped you to understand more about equity release and the ramifications it can have for selling your home. Before taking any action, you may want to contact an independent financial advise to seek their expert advice.
If you have any questions about selling your property, we’ll be happy to have a chat with you. Please call or send an email.
