An introduction to Equity Release.

What is an Equity Release Plan?

Simply put an Equity Release Plan is a method of borrowing, or ‘releasing’, cash, for people aged 55 and above using the value of your property as security.

The most common type of Equity Release is called a “Lifetime Mortgage”, which is simply another way of saying that it is loan secured against your property. Unlike standard mortgages which have a specific term, the loan typically does not have to be repaid until the borrower dies or moves into permanent long term residential care.

How does an Equity Release Plan differ from a standard mortgage?

In many ways an Equity Release (Lifetime Mortgage) Plan shares many similarities with a standard mortgage. The amount you are allowed to borrow, or “release”, is heavily dependent on the value of the property, and the company offering you the loan will be taking a legal first charge on the property in the same way as a conventional mortgage lender would.

Where things become significantly different is the way the amount borrowed is calculated and the terms and conditions concerning the interest payable on the loan. When reaching the maximum figure that a lender would be willing to lend, there are two main factors that are considered: the value of the property and the age of the applicant or applicants.

Valuing the property for the purpose of Equity Release is no different to a standard mortgage lender valuing a property for conventional mortgage purpose. Once a figure has been established it is easy to work out the maximum percentage of the valuation that the lender would be willing to lend or, using the preferred wording, “release”.

How do I know how much cash I can have?

When applying for a standard mortgage, the lender will pay considerable attention to your income. However, as there are usually no compulsory monthly repayments with an Equity Release Plan, the Equity Release lender isn’t interested in your income. Instead, the lender is interested in your age.

The older you are, the higher the percentage of the value of your property they will be willing to lend.

The principle behind this is quite simple. There are no monthly repayments required on a typical Equity Release Plan, instead the interest rolls up and the amount you owe increases year on year, though there are always guarantees to ensure the final amount owed will never exceed the value of the property.

All lenders allow you to make either ad hoc or regular repayments at an amount you choose in order to slow down the rate at which the interest rolls up.

The younger you are when you take an Equity Release Plan the longer there will be for the interest to roll up. Therefore for everybody’s protection, the amount you can take at age 55 will be considerably lower than what you can take at age 85 or older.

How does the lender get repaid?

As stated earlier, in the vast majority of cases the lender is finally repaid the original amount borrowed, plus interest which has been rolled up and added during the term of the loan, from the sale of the property. The sale almost always follows the death of the borrower or the permanent move into long term care.

There are several variations of this style of Equity Release that can allow further borrowing, or monthly repayments during the life of the loan and it is wise to take a look at all the options from a wide range of lenders before settling on one that closely meets your requirements.