Equity Release: Lifetime Mortgages, Risks and Advice

There are two equity release options: a lifetime mortgage, where you take out a mortgage loan secured on your property, and a home reversion plan, where you sell all or part of your property to a provider, usually below market value.

How a lifetime mortgage works:

• You continue to own and live in your home
• All applicants must be at least the minimum age set by your provider (typically 50 to 55) and the property must be your main residence
• If you choose to pay nothing, monthly interest is rolled up and added to the loan
• With an interest-serviced mortgage, you make monthly or one-off payments to reduce or stop the impact of the interest rolling up
• Most lifetime mortgages backed by the Equity Release Council have a no-negative-equity guarantee, where you will not repay more than the value of your home

You must be told if your lifetime mortgage does not have the no-negative-equity guarantee. If it does not, your estate is used to pay off the rest of the loan. With compound interest you will repay far more than you borrow.

How home reversion works:

• A company, or provider, buys all or part of your home, and in return you get a cash lump sum or smaller amounts to give you a regular income
• You can carry on living in the home under a lifetime tenancy until you die or move into long-term care
• The company allows you to carry on living there either rent free, or on a fixed rent or with an agreed annual increase
• The amount you are offered for your property can be much lower than the market value of your home, usually only between 20% and 60%

When your home is sold, the money is split between you (or your estate) and the company, based on the percentage you both own.

Whichever option you choose, there are usually flexible payment options, including the option to pay nothing, and the loan plus interest (if it applies) is repaid from the sale of your home after you pass away or move into long-term care. With a lifetime mortgage, the loan is paid back by selling the property when the last borrower dies or goes into long-term care.

You can take the money as a lump sum (most lenders say a minimum of £10,000), as smaller amounts taken when you need it or as a regular income, called a drawdown, or as a combination of both.

• Lifetime mortgages may have higher interest rates than ordinary mortgages, which means debt can increase quickly
• The earlier you take out an equity release product, the longer you have the loan and the more interest builds up
• There can be substantial fees to apply, including charges for advice, solicitors, valuation and arrangement, and the total could be between £1,500 and £3,000
• Agreements can be difficult to alter or include early repayment charges
• Restrictions may apply, such as not being able to use your home as a holiday let, leave it empty for long periods, or make large structural changes
• With a lifetime mortgage you must keep your home in good condition, so you will need to budget for this
• Over time the loan and accumulating interest reduces the equity in your home, so the people you leave it to will only receive what is left after the loan is repaid, or the portion that you did not sell

What it offers:

• Receive a tax-free lump sum or regular income
• Choose whether to make repayments to reduce your final debt
• Enjoy your retirement in familiar surroundings
• Unlike a standard mortgage, there is no affordability assessment

Equity Release Council members have specific standards to meet when making a recommendation, including:

• Assurance you will stay in your home for life, or until you move into care
• A no-negative equity guarantee
• Fixed or capped interest

They must say if a standard is not met with the lenders they recommend and clearly explain the risks to you. Always check your adviser is registered with the Financial Conduct Authority (FCA) by using the FCA Firm Checker.

You must hire a solicitor, and your provider cannot release the money unless you have taken out legal advice. Your solicitor goes over the details of your equity release plan and checks that you understand the risks, then confirms to your provider that you can accept the offer.

• You need to speak to a specialist equity release adviser or mortgage broker first
• Your adviser makes a recommendation for your situation and provides a suitability letter or product confirmation letter and a Key Facts Illustration (KFI)
• Once your application is approved you receive an offer document. If you are not happy or unsure, you do not have to go ahead
• You need to hire your own solicitor to check the details once you have agreed on an equity release plan

You can use the recommendation to shop around and compare similar schemes from other providers.

When you contact an adviser, confirm:

• Their fees
• What other fees you will pay, such as legal, valuation and set up costs
• If they search the whole market
• What type of equity release products they can offer

Entitlement to means-tested state benefits, Local Authority Grants or Council Tax reductions could be affected. Cash you get from your home could mean you are ineligible for certain means-tested grants, benefits like Pension Credit and local authority support for care. Check what you are entitled to first: see our guides to Pension Credit, Attendance Allowance and Council Tax Reduction.

Alternatives to look at before you commit:

• Downsizing: selling up and moving to a smaller home, then using the sale profits to raise the funds you need
• A retirement interest-only mortgage, if you can afford to make monthly repayments: each month you pay the interest, and the amount you borrow is usually only repaid when you sell your home, move into long-term care or die
• Cashing in any investments or using savings

With a retirement interest-only mortgage you still need to pass mortgage affordability checks to show you can afford the interest repayments, and your home is at risk if you do not keep up the repayments.

Equity release also affects your estate, so keep your will up to date.