Find out more about equity release with our financial advice and information. Includes advice on how to fund retirement, pension planning and the benefits and negatives of various types of equity release schemes.

What is Equity Release?

Ten years ago the equity release market was extremely small, and it was never considered that the sector would ever become a major investment option for those planning for retirement. Ten years on and a recent survey of financial advisers by Prudential found that over 90% of advisers believe that in the future equity release schemes will be the only way for pensioners to fund their retirement.

Equity release refers to the process of releasing or ’unlocking’ part or all of the excess value on a property - excluding what is still owed on any mortgage. In order to apply for an equity release scheme, candidates need to be in their mid fifties, although some schemes start at sixty, and should own their home with no mortgage or have only a small loan outstanding. As many as 23,470 lifetime mortgages worth over £1.015 billion were taken out between July 2005 and July 2006 by pensioners looking to raise extra capital through their homes.

While equity release schemes may be increasing in popularity, financial experts are quick to point out that consumers should be aware of the potential pitfalls of equity release schemes. Like all financial products, there are pros and cons to these schemes which, even if they are suitable to one individual or family, may make them unsuitable or for others.

“As more and more home owners find themselves entering retirement - ’asset rich and cash poor’ - equity release schemes are becoming a popular way to generate an income while allowing home owners to stay in their current property,” says David Garfitt, head of residential conveyancing at York and Lincoln based law firm Langley’s.

What Types of Equity Release Schemes Are There?

'There are two types of equity release; lifetime mortgages and home reversions. The first allows a loan to be secured against your home. This loan is then repaid when you die and your house is sold. Home owners can take out a ’lifetime mortgage’ and still ’own’ their home. The second, home reversion refers to when all or part of the property is sold to a third party which means that a percentage of your home will be owned by someone else.'

Equity Release Explained: Lump Sum or Regular Income

Depending on the scheme you take out, you can either receive a lump sum or be paid an income for life in what is referred to as a home income plan. It is worth noting that even if you no longer ‘own’ your home, you are absolutely guaranteed the right to remain in your home for as long as you wish - for example, until the death of the second partner, if you are married.

How do Equity Release Schemes Work?

There are two types of home income plan. With the first you take out a new mortgage against part of the value of your home. The amount of money the process raises is either handed to you as a lump sum, or is used to buy an annuity to provide a fixed income for the rest of your life. On your death, the interest on the mortgage is in most cases deducted from the value the home sale achieves.

If you were to die shortly after taking out a plan, little interest may be due, and your estate may still enjoy a reasonable value from the sale of the property. But even if you live for many years after taking out a plan with a high loan value ratio, the total bill can never be for more than the property value at death. In this case the lender loses out and you will not be forced to leave the property.

Equity Release Explained: Alternative Option

The second type of plan requires you agreeing from the outset to give up a certain proportion of your home’s value when it is sold on your death or on the death of your surviving spouse if you are married. In return you again receive either a lump sum or an annuity. If, to get a specific lump sum, you give up 60 per cent of your home’s value, then 60 per cent of its eventual sale value goes to the plan provider, regardless of what happens to property prices in the meantime. The remaining slice is yours to do with as you wish.

“Taking out a suitable equity release scheme can make immediate and significant improvements to one’s overall quality of life,” says Ged Hosty, Chairman of the Actuarial Profession, who has produced a report on equity release.

“However, since it is likely to be the last major financial transaction anybody enters into, it is essential that everybody considering such a step makes sure they are fully aware of the financial and other implications before committing themselves.”

It is a sentiment echoed by David Garfitt of Langley’s, who stressed that unbeknown to many considering equity release schemes, many financial advisors earn commission and fees and some can provide a biased opinion.

'I would highly recommend that anyone considering easing the financial burden of retirement with an equity release scheme should seek impartial legal advice,” he says.

“With a decision that affects your future and that of your beneficiaries’ it is worth getting independent objective advice to ensure you make the decision that is right for you.'

Equity Release Explained – The Pros and Cons

Pros of Equity Release

• Homeowners get a substantial sum of cash to spend or invest, just as they need it most – during retirement
• In the case of the lifetime mortgage, ownership of the property is retained and homeowners can benefit from any subsequent rise in house prices
• Equity release schemes are regulated by the Financial Services Authority, and many now contain a ’no negative equity guarantee’ so that a homeowner’s estate is not liable if the final debt exceeds the property value
• With all schemes the money released is tax free

Cons of Equity Release

• Equity release schemes may charge high interest rates and set up charges – from July 2005 to July 2006 those taking out an equity release scheme collectively paid £67.27 million in interest during the first 12 months of their plans – or around £2,897 per person, independent comparison website MoneyExpert.com claims
• Certain people who cash in on their house via an equity release scheme may suffer a loss of entitlement to means tested benefits
• These schemes can result in a reduction in the value of the homeowner’s estate, meaning that there is less to pass on to heirs
• The schemes can lead to increased amounts of debt
• There is a possibility that further amounts may not be borrowed on the property in the future
• Income tax may be payable on the income produced by the invested capital

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