Please note: this article was not written by a financial or legal specialist, and does not cover every circumstance. Please consult a specialist before making any financial or legal decisions.

Equity release is releasing money from the value of your property, which you can take a lump sum or as a set of smaller amounts.

Releasing equity from your home means you can access the money tied up in your property. This money can then be put towards the cost of care.

Equity release is most commonly used towards care given within your own home.

There are two kinds of equity release in the UK: lifetime mortgage and home reversion.

Who can release equity from a property?

To release equity from a property you own, you need to be over 55 and your property has to be worth over £70,000.

 

Questions about funding care?

Care Sourcer’s friendly care experts are on hand to provide guidance on typical care costs, help you explore your funding and benefit options, or even negotiate care fees on your behalf. Call us on freephone:

0800 098 8299

(Mon-Fri, 9am-5pm)

Releasing equity to pay for care with a lifetime mortgage

A lifetime mortgage is the most usual way to take out equity release.

This is when you take a loan secured on your home. This doesn’t need to be paid back until you die, or go into long-term care, such as a care home.

With a lifetime mortgage, your home continues to belong to you and you have full responsibility for it.

Types of lifetime mortgage

There are two different types of lifetime mortgage:

  • interest roll-up mortgage – the equity release is paid to you in one lump sum or a series of regular smaller sums. You don’t need to make any regular interest payments throughout the life of the mortgage. The interest on this mortgage is repaid at the end, once the property is sold. 
  • interest -paying mortgage – the equity release is paid to you in one lump sum and you make regular interest payments throughout the life of the mortgage. The amount you borrowed and any outstanding interest is repaid at the end, once the property is sold. 

Protecting against negative equity on a lifetime mortgage

When you die or move into long-term care (such as a residential care home) the property will be sold and the proceeds from the sale will be used to pay off the lifetime mortgage loan.

If there is money left over after the loan has been repaid, this will go to your beneficiaries. However, if the money from the sale of the property doesn’t cover the loan amount, your beneficiaries will need to pay for the extra needed to repay the loan. 

Most lifetime mortgages feature a ‘no negative equity guarantee’. This means that you, or more specifically, your estate will never owe more than the property is worth when it is sold – even if the debt has become bigger than the value of the property.

Paying interest on a lifetime mortgage

Interest on a lifetime mortgage is charged on what you have borrowed. This can be repaid or added on to the total loan amount after you die or move into long-term care, and the home is sold.

You don’t have to make interest payments on a lifetime mortgage, but can do if you prefer in order to reduce the debt.

The cost of arranging a lifetime mortgage to pay for care

There can be costs associated with arranging a lifetime mortgage.

These may include:

  • An arrangement fee to the mortgage lender 
  • Legal fees
  • Adviser fees
  • A completion fee, which can sometimes be added to your mortgage amount
  • Buildings insurance

Altogether, this could cost between £1,500 and £3,000 in total, depending on your circumstances. 

Releasing equity to pay for care with home reversion

Another option to release equity in your property is using what is called a ‘home reversion’ scheme. These are far less common than lifetime mortgages.

Home reversion is when some or all of your property is sold to a home reversion provider, and you receive a lump sum of money, or a rent-free lifetime lease.

Like a lifetime mortgage, home reversion allows you to stay in your home and release money from your property which you can put towards the cost of your care. You can stay in your home rent-free until you die or decide to move out.

Unlike a lifetime mortgage, this is not a loan and there is no repayment needed. Please note that in order to release equity using home reversion, you first have to pay off any debts secured against your property, such as an existing mortgage.

Protecting against negative equity with home reversion

With home reversion you don’t need to worry about your property going into negative equity. This is because you sell all or part of your home to the home reversion provider at the time of arranging the home reversion.

However, it’s important to know that you will be paid less than the market value (usually 30%-60% of market value) of the property by the home reversion provider. The older you are when you arrange the home reversion, the higher the percentage you’ll get of the property’s market value.

The cost of arranging home reversion to pay for care

There can be costs associated with arranging the home reversion scheme.

These may include:

  • An arrangement fee to the home reversion provider
  • Legal fees
  • Adviser fees
  • A valuation fee on your property

Summary

Does it cost money to arrange equity release?

There are arrangement fees associated with organising, which reach between £1,500 and £3,000 in total, depending on your circumstances

From what age can you take out a lifetime mortgage?

From the age of 55.

From what age can you arrange a home reversion plan?

From the age of 65.

Do I have to pay monthly interest on a lifetime mortgage?

This depends on what kind of lifetime mortgage you have.

If you have an interest roll-up lifetime mortgage where the equity release is paid to you in one lump sum or a series of regular smaller sums then you don’t need to make any regular interest payments.

If you have an interest-paying lifetime mortgage then the equity release is paid to you in one lump sum and you make regular interest payments throughout the life of the mortgage. 

How can I avoid negative equity when releasing equity in my property?

The Equity Release Council is a trade body whose sole purpose is to promote high standards of conduct and practice throughout the equity release market, with consumer safeguards at its heart. 

Make sure you are dealing with a provider that belongs to the Equity Release Council. This means you’ll be covered by their no-negative-equity guarantee, and will never owe more than the value of your home.

What if I want to move?

If you have a lifetime mortgage then you have the right to move and transfer the lifetime mortgage to your property, so long as you buy a property that meets your lender’s criteria.

If you use a home reversion scheme, you may be able to transfer the home reversion scheme if you want to move into another property. However, it’s important to discuss this in advance with your home reversion provider when arranging the scheme.

Can I go into negative equity with home reversion?

With home reversion you don’t need to worry about your property going into negative equity. This is because you sell all or part of your home to the home reversion provider at the time of arranging the home reversion.

Can I release the full value of my property with a home reversion scheme?

No, you will be paid less than the market value of the property by the home reversion provider. This means that you won’t be able to release the full value of your property. 

Are there risks associated with home reversion schemes?

There are risks associated with home reversion schemes. You will no longer be the sole owner of your home, and it can be expensive to cancel the plan. They can also have major implications for benefits, tax, and inheritance.

Do I need to get financial advice before deciding on an equity release scheme?

Yes, you should always seek professional financial advice before taking out any kind of equity release scheme.


Questions about funding care?

Care Sourcer’s friendly care experts are on hand to provide guidance on typical care costs, help you explore your funding and benefit options, or even negotiate care fees on your behalf.

Call us on freephone: 0800 098 8299 (Mon-Fri, 9am-5pm)

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