Equity release schemes offer homeowners in the UK a means to unlock the value tied up in their properties without the need to relocate. 

These financial products are particularly prevalent among older homeowners seeking additional funds.

This article provides an in-depth understanding of the available equity release schemes, their potential implications, and common queries surrounding them.

What Are the Most Popular Equity Release Schemes in the UK?

In the UK, the two most popular equity release schemes are Lifetime Mortgages and Home Reversion plans.

Lifetime Mortgages, the most common, allow homeowners to borrow a portion of their home’s value.

Interest accumulates on the loan, which is repaid when the homeowner dies or moves into long-term care.

On the other hand, Home Reversion plans involve selling a part or all of your home to a reversion company.

The homeowner can live in the property rent-free until they die, at which point the property is sold.

Despite its lesser popularity, it offers a guaranteed inheritance, a feature unique to this scheme.

Key Equity Release Schemes

As highlighted in the recent Q3 2023 market statistics from the Equity Release Council, new customers showed varied preferences in their product choices with 53% opting for drawdown lifetime mortgages, while 47% chose a single lump sum product.¹

Understanding the different types of schemes is crucial for making informed decisions.

Let us delve into the key types of schemes available:

1. Lifetime Mortgages: This scheme involves a loan against the homeowner's property. There are no compulsory monthly repayments; instead, the loan plus interest is repaid when the house is sold, often upon the homeowner's death or move to long-term care. Homeowners retain full ownership of their property.
2. Drawdown Lifetime Mortgage: Provides flexibility by allowing homeowners to release money in stages. Interest accumulates only on the amount withdrawn, making it potentially more cost-effective in the long run.
3. Lump Sum Lifetime Mortgage: Here, homeowners take a single, substantial payment from their property's equity. Interest starts accruing immediately on this sum.
4. Enhanced Lifetime Mortgage: Tailored for those with specific health conditions or lifestyle choices that might reduce life expectancy. It often allows for a more significant equity than standard schemes.
5. Home Reversion Plans: Homeowners sell a part or entire home to a reversion company. In return, they receive a lump sum or regular income and continue living in the home rent-free, albeit without full ownership.
6. Protected Lifetime Mortgage: This allows homeowners to guarantee that a percentage of their home’s value will be left as an inheritance for their heirs.

How to Choose the Best Scheme for You

To choose the best scheme for you, it is imperative to assess your financial needs, understand the product features, consider future plans, seek professional advice, and review terms and conditions.

Here is a breakdown:

• Assess Financial Needs: Evaluate your current and future financial requirements. Consider whether you need a lump sum, regular income, or the flexibility to draw down funds as and when required.
• Understand the Product Features: Familiarise yourself with the different schemes available and their features, such as interest rates, No Negative Equity Guarantee,  and early repayment charges.
• Consider Future Plans: Consider potential changes, like wanting to move homes, health considerations, or leaving an inheritance for heirs.
• Professional Advice: Consult an independent financial advisor specialising in equity release. Their expertise can guide you to a product that aligns with your circumstances and goals.
• Review Terms and Conditions: Ensure you read and understand all terms and conditions of any potential equity release scheme. This will help in avoiding any unforeseen complications or costs down the line.

Common Misconceptions about Equity Release Schemes

There are several misconceptions about equity release such as loss of property ownership, exceeding property value debts, or a compromised heirs’ inheritance.

Here is a breakdown and clarification of each of these.

Loss of Property Ownership

One of the biggest misconceptions about releasing equity is that it results in the loss of property ownership, leaving you at the mercy of lenders. 

The truth is

Most schemes, especially lifetime mortgages, allow you to retain property ownership, with the loan typically repaid upon your death or if you move into long-term care. 

On the other hand, even though home reversion schemes involve selling a portion or all of your property to a reversion company, you are usually granted a lifetime tenancy, allowing you to live in the property rent-free for life.

Exceeding Property Value Debts

A prevalent belief is that you can end up owing more than your property's value, leading to debts being passed on to your heirs. 

Equity Release Council member providers offer a No Negative Equity Guarantee, which ensures that you or your estate will never owe more than the property's sale value, even if the debt exceeds the property's value over time owing to mounting interest.

Compromising Heirs' Inheritance

There is a widespread belief that engaging in such schemes will deplete any inheritance you wish to leave for your heirs.

While it is true that equity release can reduce the value of your estate, many schemes have features that allow you to ring-fence a portion of your property's value to ensure a guaranteed inheritance for your loved ones.

3 Equity Release Scheme Pitfalls to Look Out For

Though reliable and well-regulated, there are several potential pitfalls to be aware of, such as early repayment charges, impact on state benefits, and tax consequences. 

#1. Early Repayment Implications

If you decide to pay back your loan before the set term, you might be hit with early repayment charges.

These fees can be substantial. So, if there is a change in the economic climate or your personal circumstances, and you feel the need to repay early, these charges can strain your finances.

Tip: If there is even a slight chance you might want to pay off early, look for schemes that have minimal early repayment fees or flexible terms.

#2. Impact on State Benefits

Taking money from an equity release can potentially alter your eligibility for certain state benefits that are determined based on your income or assets.

The extra funds, whether they come as a one-time lump sum or additional periodic income, can decrease the state financial assistance you qualify for.

Learn More: Impact of Equity Release on State Benefits

#3. Tax Consequences

The money you get is not subject to tax. However, what you do with that money might have tax implications.

If you invest your funds and earn interest, this interest might be taxed.

Additionally, if the lump sum pushes your total assets above the inheritance tax threshold, it can have tax consequences for your heirs after you pass away.

Read On: Tax on Equity Release Plans

Common Questions

Conclusion

Equity release schemes offer a valuable avenue for homeowners to tap into the equity of their properties, providing a financial boost when needed.

When approached wisely, after weighing all the pros and cons and seeking expert advice, these schemes can be a strategic tool for financial empowerment. 

It is essential to make informed choices and to always remember the long-term implications of equity release schemes.