How Do Equity Release Mortgages Work?

Now that mortgage providers are asking for such high deposits, the price of even the smallest starter home is now out of the reach of many first time buyers. That, plus the fact that house prices are now on the increase again, means that more and more parents are looking to equity release mortgages to provide the cash to give their children a helping hand onto the property market. If you are looking for a way to get your hands on the equity that is tied up in your home, here are the facts that you need to know.

What is an equity release mortgage?

An equity release mortgage unlocks the value that you have tied up in your property and turns it into cash, which can be used for any purpose you choose. Such arrangements are available to homeowners who are age 55 or over and they usually require no monthly repayment, they are repaid from the proceeds of the eventual sale of the property.

Why would you need to use an equity release mortgage?

Over the years, the price of houses has risen fairly steadily, which has led to many older people finding themselves in the situation of having money tied up in their property, but still being unable to afford to help their children buy a property or even pay for their own health care. An equity release plan enables them to realise that cash, but does not require them to move out of their home.

What types of plans are available?

Different providers offer different types of schemes and the main types are as follows. There are home reversion plans, where you sell the property, but you still have the right to live in it. Drawdown lifetime mortgages are schemes where you retain ownership of the property and borrow against the value of the property when you need to and, a simple lifetime mortgage, is one where you drawdown all the equity value in one go. In all cases, the value of the loan, plus the interest, is repaid when the property is sold.

Are there any downsides to equity release mortgages?

Equity release plans used to have a bad reputation because people didn’t really understand what they were signing up for. Today, however, they are properly regulated and the terms are well documented by lenders. When you take out a mortgage release plan, you are borrowing money and there will be fees and interest payable. That means that are reducing the amount of money that your family will inherit and the family home will be sold to repay the loan. You should also make sure that any money you receive will not impact on your state benefit payments.

How do you find the best equity release mortgage for you?

As is the case with any type of mortgage, each lender has their own particular schemes with different terms, different fees and interest rates, and different degrees of flexibility. Most schemes will still be available to you even if you are not in the best of health and with many, you can still move home if you wish to. The best thing to do is talk to a financial advisor, tell them about your circumstances and your requirements, and they will be able to recommend the best equity release plan for you.

How to Make Sure UK Equity Release Schemes Do Not Affect Your Means Tested Benefits

Firstly, There is no tax to pay on the money released from your home, provided it is your main residential property.

Releasing capital from your home that takes your savings over £10,000 can affect your means tested benefits if your income is less than the minimum the state says you need to live on. Therefore you should ensure that the balance of any equity release money left over after spending cash on immediate needs does not take you over the ten thousand pound threshold. At least not for a long period, as money entering and leaving your account very quickly is unlikely to alter the situation.

Non means tested benefits such as disability benefit and attendance allowance are totally unaffected by the extra money created from your equity release, but invalidity grants for home adaptations could be influenced, even if your savings are less than ten thousand pounds. In this context if you are seeking such grants, you should first establish your position with the local authority before entering into an equity release scheme and definitely before instructing any work to commence.

Pension Credit is a means tested benefit that could be reduced or even extinguished by equity release money arriving into your account. Pension credit payments are added to your income if you are over aged 60. This is to top up low level earnings or the state pension so that you have the minimum weekly income that the state says you need to live on. After 5th April 2010 this is £132.60 for a single person and £202.40 for a couple. If your savings exceed £10,000, every £500 over this amount can reduce your weekly pension credit by one pound.

If your circumstances change during the five year period from when you were assessed for pension credit you do not need to notify the Department of Works and Pensions. People over aged 75 at the time their pension credit decision was made do not have a time limit.

National Health Service benefits are available for persons that are claiming Pension Credit. These include free prescriptions, dental treatment, free eyesight tests, vouchers for spectacles and even reasonable transport costs for health treatment.

Council Tax benefits are available for people on low incomes that may be claiming pension credit. The amount of council tax benefit reduces proportionately as the level of savings increases from £10,000 to £16,000.

The best way to ensure that your means tested benefits are not affected by equity release is to consult an independent equity release adviser at the equity release schemes website who can provide you with an indication of the level of any benefits that may be reduced. Some advisers have access to computer software that can assess the effects of equity release schemes on state benefits.

As a general rule, make sure that the amount of equity you have released does not take your savings over the £10,000 threshold after you have spent money on essential items.