This article is taken from our autumn 2022 edition of Equinox. You can view the full version here.
Equity release is a way to free up funds from your home, without having to downsize or relocate. Perception of this market has improved significantly over recent decades and the industry is now fully regulated, making it a much safer option. Richard Levell from Professional Mortgage Services outlines how the market now operates.
Equity release in previous decades
Looking back to the 1990s, equity release built itself a bad reputation. Many of the old schemes saw borrowers effectively sign over the ownership of their home to the lender. Furthermore, the level of debt would often rise in line with any future increases in the value of the property, leading to horror stories, whereby unsuspecting borrowers might have seen the size of their mortgage run away with itself, as the property market boomed.
The market as it is now
In recent years, much has changed. Equity release loans, like traditional ‘high-street’ mortgages, are now regulated by the Financial Conduct Authority (FCA). Any lender operating within this industry must be a member of the Equity Release Council, an independent trade body committed to ensuring that all 700+ products within the market adhere to the following strict guidelines:
- Interest rates must be fixed for the lifetime of the loan.
- The borrower may remain at the property for the rest of their life.
- The right to move home and to ‘port’ the mortgage over to the new address.
- A ‘no-negative equity’ guarantee.
- The option to service the interest or make penalty-free payments against the loan, usually up to 10% of the mortgage balance per year.
Rates start from around 1% more than you might pay for a market-leading ‘high-street’ mortgage. In these times of high inflation and steadily increasing interest rates, the ability to fix a rate indefinitely may appeal to those looking to safeguard against any future rise in the cost of borrowing. Set-up costs are low, with many products having no arrangement fees and often being enhanced with a free valuation.
It should be noted, however, that unlike traditional mainstream mortgage products, equity release loans carry significant redemption penalties, typically for at least the first eight years of the plan. Also, if no payments are made to service the interest, then the debt will ‘roll up’ over time and the equity in the borrower’s home will be eroded as a result.
Who can benefit?
Any UK homeowner (aged 55 or above) can apply for equity release and it is even possible to raise funds against a second home or a rental property. Depending on an applicant’s age, a lender might be able to offer as much as 60% of the value of their home, although market-leading products tend to be available at a lower ‘loan to value’.
Some borrowers will simply be looking to raise capital to help supplement their incomes as they head into retirement. For those, the fact that modern products now allow funds to be drawn in stages, as and when required, is ideal. On the other hand, some may wish to raise capital for a one-off expenditure such as buying a second home or rental property.
Then again, borrowers might wish to delay the repayment of their interest-only mortgage, which may be nearing the end of its term, with their original plan having been to downsize as they head into retirement or to draw from investments to repay the debt. They might now prefer to remain in the family home for the foreseeable future, or to leave well-performing portfolios untouched in the background.
Inheritance tax planning
Increasing numbers of borrowers are keen to plan for any future inheritance tax (IHT) liability that might be incurred by their beneficiaries. With IHT charged at 40%, the tax-free allowance having been frozen at £325,000 per individual since 2009 and fixed until April 2026 and with UK house prices having increased by over 50% over the course of the last decade, homeowners are increasingly finding themselves caught in the ‘IHT trap’.
Equity release can have a direct impact on an IHT liability as the debt will be offset against the value of the estate upon death. For example, an equity release borrower with a £2.3m house as their sole asset and a loan of £600,000 would then be worth £1.7m for estate planning purposes, cutting the IHT bill from £580,000 to £280,000 in the process, as shown in the table one below.
|Less joint nil rate band||£650,000||£650,000|
|Less joint residence nil rate band*||£200,000||£350,000|
*Residence nil rate band is tapered by £1 for every £2 that the total estate value exceeds £2million.
Note that where funds released via equity release are gifted, the full IHT saving is only achieved once the donor has survived for 7 years. Until that stage, the gift will still attract an IHT liability, albeit on a tapered basis.
With this in mind, more property owners are choosing to ‘gift’ some of the equity to their family now, to see them enjoy the benefit of their early inheritance.
Please note that this is a lifetime mortgage. To understand the features and risks, ask for a personalised illustration. Taking out an equity release scheme may have an impact on state or local authority means-tested benefit entitlements (both now and in the future).
Find out more
At Professional Mortgage Services, our team of experienced specialists will be delighted to help you. We are members of the Equity Release Council and have a long-standing relationship with Equilibrium, having assisted their clients with their mortgage needs for many years.
Please contact Richard Levell 0161 237 755 or email@example.com or Martin Sloan 0161 237 7526 or firstname.lastname@example.org.