There are two types of equity release; lifetime mortgages and housing reversal plans. Both are regulated by the Financial Conduct Authority. By using an equity release product, a homeowner can take out a regular lump sum or smaller sums of the value of their home, while staying in their home. The release of capital is safe because the market is regulated by the Financial Conduct Authority (FCA).
This means that there is significant consumer protection, whether you choose a life mortgage or a home reversal plan. A capital release mortgage involves a lender giving you cash in exchange for a portion of the proceeds from the sale of your property later on. But unlike a traditional mortgage, which you pay within a certain period of time, a capital release loan is not settled until you leave your home. The definitions and regulations go a long way to ensure that there is adequate consumer protection for individuals seeking to make a capital release transaction.
Some people may be able to release larger lump sums due to health problems or may prefer to make partial or full monthly reimbursement, with the option of accumulating them at a later date if monthly refunds become unaffordable. The most popular form of equity release is to apply for a loan based on the value of your home (as long as it is your primary residence). With this, homeowners can convert the money they release into a guaranteed lump sum, a reserve from which they earn in stages, or a regular income. Traditional mortgages may offer a cheaper way to free up money from your home, although they are subject to age restrictions and older borrowers may struggle.
The Equity Release Council requires that you meet with an attorney as a mandatory part of the capital release application process. Some lifetime mortgages pay you a single lump sum, while others allow reduction, meaning you access cash in parts when you need it. If you are considering paying part of what you owe on your capital release plan before you die or move to health care, be aware that significant prepayment fees will often apply. For many UK homeowners aged 55 and over, releasing capital is a useful way to supplement income, pay off debts or make life easier for their loved ones.
The benefit of a reduction loan is that interest is only charged on money that you have already released from your capital. Ultimately, releasing capital can be considered a safe way to access fixed value in your home because it is regulated by the FCA and there are strict requirements on advice. Charges will vary from provider to provider and between advisors, but the total cost of setting up capital release can reach £3,000. If you have taken out a capital release plan, you may be concerned that selling your home isn’t an option.
Be sure to discuss alternatives with your advisor, which could mean delaying the release of capital for a while until it works best for your circumstances. Article 3 (b) of the credit agreement in the FCA Manual stipulates how a lifetime mortgage credit agreement should be reached.