What is an Equity Release Mortgage?
An equity release mortgage is also known as a lifetime mortgage and is one way of releasing equity from your home without selling it. The other way is known as home reversion and works differently. Here is a brief guide to what you need to know about equity release mortgages.
As a rule of thumb, you will need to be aged 55 or over to be considered for an equity-release mortgage. You will also need sufficient equity in your home to make the process worthwhile. How much equity you will need will depend on various factors, the key point to remember is that the sale of your home should cover both the amount borrowed and the interest accrued over the time between you taking out the loan and your death (or move into permanent care).
In theory, there could be an unlimited number of people on the deeds of an equity-release mortgage. In practice, it would typically be one or two. When there is more than one person named on an equity-release mortgage, surviving partner would be able to continue to live in the property until their death (or move into permanent care) and then the property would be sold.
The no-negative-equity guarantee
In the early days of equity release, one of the concerns about the product was that it carried the risk of putting the borrower into negative equity, meaning that the cost of repaying the loan could eat into the rest of the borrower's estate to the point where nothing was left for their loved ones. Now it is possible to take out equity-release mortgages with a no-negative-equity guarantee, which means that the lender will only have a claim on the sales price of the borrower's home, not on the rest of their estate.
The core equity-release mortgage
The basic equity-release mortgage is essentially a regular mortgage but in reverse. The borrower already owns the home, but wants to convert some of their bricks-and-mortar equity into actual cash. They therefore borrow against the value of their home as with a normal mortgage and receive a lump sum to use as they wish. This lump sum accrues interest in the usual way, but the borrower does not make any repayments during their lifetime. Instead, the capital and interest are both repaid upon their death (or move into permanent care).
Variations on equity-release mortgages
In addition to the core version of the product, there are various niche products available to cater for people with specific needs and wants. For example, there are now equity-release mortgages which allow the borrower to “drawdown” funds as and when they need them so they minimize the amount of interest they pay. There are also equity-release mortgages where the borrower pays back the interest so their heirs only pay back the capital and equity-release mortgages which allow for some degree of flexible repayments, essentially the borrower pays what they can when (and if) they can (or wish). There are also equity-release mortgages which basically allow borrowers to buy themselves out of the product, for example, if they change their minds about staying in their current home and decide they want to downsize.
Financial implications of equity-release mortgages
Equity-release mortgages are loans not cash-windfalls or income, hence they are tax-free, however, they will increase the borrower's net worth and therefore their ability to access means-tested benefits. If the borrower chooses to keep the money for themself, then the only impact on their estate's value is the cost of the interest accrued up to the point of their death. If, however, they choose to give it away, they may reduce the ultimate value of their estate and hence the amount of Inheritance Tax payable at the time of their death.