Equity release is a common method for older people to release cash from their homes. However, it’s not suitable for everyone. In this article, we’ve answered some of the most frequently asked questions about equity release.
5th July, 2022
Equity release is a common method for older people to release cash from their homes. However, it’s not suitable for everyone. In this article, we’ve answered some of the most frequently asked questions about equity release. We talk about what equity release is, how much equity release costs, and how long it takes. Then we talk about some of the complexities that often arise with equity release. Such as can you get equity release on leasehold property and is equity release tax-free.
If you’re looking for something in particular, such as can I get equity release on a non-standard construction house? Or how does equity release work when you die? Then use the menu below to skip to the question that you’re interested in. Otherwise, read on for a complete overview.
Equity release is used by homeowners over the age of 55 who want to release cash from the value of their homes. There are different types of equity release products. Some allow you to take immediate payment of a lump sum amount, whilst others release equity as several smaller payments.
There are no restrictions on what you can use the money for. Some common uses of equity release are consolidating debt, home improvements, funding retirement, travelling, and so on.
Taking equity release on your house is surrendering a significant proportion of an asset to realise an immediate gain. You must be aware of how you can protect yourself against any financial complications that might arise as a result of equity release. Two options that can help you do this are:
Inheritance Protection. Inheritance protection with equity release allows you to protect a portion of the property as an inheritance for your family. If you decide to do this, the ringfenced portion will be excluded when calculating how much you can borrow.
No negative equity guarantee. This option means that you’ll never owe more than the value of your property. A situation whereby you owe more than your property is worth is known as ‘negative equity’.
You don’t need to repay the equity release until either the borrower passes away or the homeowner moves into permanent care. The outstanding debt is then repaid from the sale of the property. There are two different types of equity release.
A lifetime mortgage is the most common type of equity release. With a lifetime mortgage, you take out a mortgage against your home but usually won’t have to make any repayments whilst you’re still alive. Interest is added to the loan, which is then repaid when the house is sold. Some lifetime mortgages are more flexible and allow you to repay interest and/or some of the principal sum, but this varies by lender. As the interest keeps accruing, the debt can start to rise quite rapidly. It’s important to make sure that you check if you can get a ‘no negative equity guarantee’ to make sure your estate won’t be liable for more than the value of your home.
Home reversion lets you sell a portion of your home to an equity release provider. You sell some, or all of your home to a provider at below market value to realise an immediate cash sum. The provider effectively co-owns your home, however, you retain the right to live in the property for the remainder of your life.
Now that we’ve covered what equity release is, let’s take a look at some of the most common questions that crop up about the topic.
How long does equity release take?
Between 6 and 8 weeks. This will depend on the type of equity release you choose, the provider, and, of course, how complicated your situation is.
There is a sizable amount of legal paperwork to fill out to obtain equity release. So, if you want to speed things along it’s a good idea to consult an experienced solicitor.
How much does equity release cost?
There are two components to the cost of equity release, the initial payment and the ongoing interest. The cost to set up an equity release plan is between £800 and £2,000. The setup costs typically consist of an arrangement fee (also known as an application fee) which is typically around £500 and solicitors fees, which tend to be £600-1500.
Interest on equity release tends to be fixed but compounding. This means that interest is charged on the principal amount of the loan, plus any interest that has accrued to that date.
Can I sell my house if I have equity release?
You can still sell your house if you have equity release. Most equity release schemes will allow you to move a lifetime mortgage to a new property. If you’re thinking about selling your house with equity release, you should make sure that the home you’re moving to meets the lending criteria of the equity release provider. Talk to the lender to make sure that the property will be approved and you can move the mortgage.
If the property doesn’t meet lending criteria, perhaps because it is of significantly lower value than your current home, then it’s still possible for you to sell your house with equity release. You may however need to repay some or all of the mortgage back. This could trigger early repayment charges, which in some cases can be significant.
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Can you get equity release on a leasehold property?
Yes, you can get equity release on a leasehold property. The requirements that you need to meet will differ depending on the lender. You will likely have to provide your lender with information about the property relating to the lease length, condition, and lease arrangements.
This information helps the lender make an informed decision about whether or not they will be able to sell the property once the equity release term ends. They may need some confirmation from a surveyor that the property is in good condition.
If the lease is too short for the lender (typically below 75 or 80 years) then you still have options available. You could extend the term of the lease. However, this comes with a cost, so make sure to speak to your landlord or managing agent to get the full picture. Read our guide on leasehold expiry to find out more about how to extend your lease. Alternatively, you may be able to purchase a share of freehold.
Is equity release tax-free?
Equity release allows you to realise a lump sum of cash from your property. Understandably, this leaves many homeowners wondering, “do I pay tax on equity release?”.
You do not pay income tax on equity release. Because equity release is a mortgage, for tax purposes it is classed as a loan, and not income. So it isn’t subject to the same taxes as income.
But what about Capital Gains Tax (CGT)? This tax is often associated with property as they are high-value assets that typically increase in value over time. You usually pay CGT on the increase in value of an asset when you sell it. However, you don’t pay any Capital Gains on equity release. This is because Capital Gains Tax is only charged when the asset is sold, since equity release plans don’t impact the value of the property they are exempt from Capital Gains Tax.
How does equity release work when you die?
When someone dies their property is dealt with by the executor of their will. If the deceased’s property has equity release then usually it will be sold as part of the estate, and the equity release plan will be paid off with the proceeds. However, you don’t have to sell the house just because the property has equity release. If the beneficiaries want to keep the property, it’s possible to settle the outstanding amount in other ways. Check out our complete guide for more information on selling a house when someone dies.
Can you be refused equity release?
Yes, you can be refused equity release. Most equity release providers will take a look at factors relating to your financial situation and your house’s condition and construction when deciding on whether you can qualify for equity release. We take a closer look at those factors here.
Age. You must be at least 55 years old to obtain equity release. Some providers do have upper age limits, although it’s rare. Typically lenders will allow you to release more equity the older you are since they’re likely to get their return more quickly.
Location. Most homes in the UK are eligible for equity release from all providers. However, some providers don’t lend on properties in the Isle of Man and Northern Ireland. So if you live in one of these areas there’s a risk that your equity release application could be refused.
Lease Length. Properties with a shorter lease length of below 75 or 80 years will likely need a lease extension before they become eligible for equity release.
Property Condition. Your equity release provider will take the repayment on the sale of the property once the owner either dies or moves into permanent care. Before they accept an equity release request they will want to closely examine the condition of the property to assess its saleability. If your home isn’t well maintained and in good condition then it could mean that you end up having your equity release application refused.
Outstanding Mortgage. If the property still has an outstanding mortgage then it will need to be cleared. This can be done using the money from the equity release. However, if the amount remaining on the mortgage is too high then it could lead to the equity release being refused.
Property Value. Most lenders will stipulate that your property needs to be worth over £70,000. Otherwise, you could be refused equity release. It’s a good idea to get an online valuation before applying for equity release.
Construction type. Equity release providers are more inclined to lend on properties that are ‘standard construction’. I.e. properties that are built of brick or stone with pitched roofs. Properties that are of ‘non-standard construction (e.g. Airey or Timber Framed houses) are more difficult to obtain equity release on. Some providers are increasingly prepared to lend on properties with non-standard features, however, such as flat roofs or annexes.
Can you pay equity release back early?
Yes, you can pay back the equity release early if you choose to. If you have a lifetime mortgage (the most common equity release product) then you can make early repayments. Keep in mind that equity release is intended to be paid off from the sale of your house when you die or move into long-term care. So if you choose to pay it off early you may incur early repayment fees. These fees vary by provider. So if you think that there’s a chance that you will pay back your equity release plan early, read the terms and conditions about early repayments before you take out equity release.
In this article, we’ve answered some of the most common questions about equity release. We’ve covered what equity release is, how long it takes, and how much it costs. We’ve also walked you through some of the complexities that can arise when taking out an equity release plan. Such as whether or not you can get equity release on a leasehold property, if you pay tax on equity release, if you can be refused equity release, and how to pay back equity release early.
People often choose to take out equity release plans because they are looking to receive cash from their homes quickly. The interest amount from equity release can stack up quickly, meaning that it may not be the best financial decision for you or your surviving relatives. Another solution is to sell your house fast for cash to a cash house buyer like SmoothSale. We buy houses for cash using our funds, so we can complete transactions in as little as seven days. The best part is, that it’s completely fee-free – we’ll even cover your legal fees. We buy any house in any condition. So why not get in touch today on 0800 368 8952 and find out how we can help.