Are you wondering how equity release works? It’s a financial solution that allows homeowners, typically those aged 55 or older, to release a portion of the equity tied up in their property. By unlocking this equity, individuals can access a lump sum or regular payments, providing financial flexibility in retirement.
Understanding the ins and outs of equity release is essential when considering this option, to ensure that it aligns with your goals and circumstances and that you are making an informed decision. A mental capacity assessment may be required to determine where a person is able to make the decision to enter into an equity release agreement, where there are concerns about the person’s understanding of what an equity release agreement is or the details relating to the proposed specific agreement.
Table of Contents
- What is an Equity Release loan?
- What is a Lifetime Mortgage?
- What is a “Drawdown”?
- What are the benefits of an Equity Release Lifetime Mortgage?
- What is a Home Reversion Plan?
- What does “loan to value” mean?
- What is the maximum “loan to value” on an Equity Release mortgage?
- At what age can I take out an Equity Release loan?
- Why would someone need a mental capacity assessment to secure an Equity Release mortgage if they have a Lasting Power of Attorney in place?
- What if I have an Enduring Power of Attorney rather than a Lasting Power of Attorney?
- When are mental capacity assessments required for Equity Release mortgages?
- What happens if the person being assessed does not have mental capacity to enter into an Equity Release agreement?
What is an Equity Release loan?
An Equity Release loan (also known as an Equity Release mortgage) allows borrowers to free up capital that is locked into their home (this is referred to as the “equity” in a person’s property). There are two different types of Equity Release: Lifetime Mortgage and Home Reversion Plan.
What is a Lifetime Mortgage?
A Lifetime Mortgage is the most common type of Equity Release and allows you to borrow money secured on your property. With this type of mortgage, you will have the opportunity to borrow a set amount of money but have the flexibility of drawdowns.
What is a “Drawdown”?
Drawdown Equity Release is when the homeowner does not receive their loan as a lump sum. Instead, they receive a facility that allows them to take their total amount in instalments over time.
These are called reserved funds, when a lender agrees the amount of lending at the outset and the borrower then chooses when to drawdown their available funds. This type of lending is used for situations such as inheritance planning, paying for care arrangements or home improvements.
What are the benefits of an Equity Release Lifetime Mortgage?
The benefit of a Lifetime Mortgage is that it gives you flexibility to make decisions on how to use your capital and to remain in your home without downsizing. At the point where your home is then sold (for example, if you became unable to stay in your own home due to ill health or when you die) the Equity Release loan would be paid off in full.
What is a Home Reversion Plan?
A Home Reversion Plan is when you raise money by selling all or part of your home whilst continuing to live in it. A Home Reversion Plan allows a person to sell a percentage of their home to release money that is tied up in their property. The lender profits by acquiring a percentage of the property’s future sale value. This can also sometimes be known as a “Reverse Mortgage”. Borrowers can benefit from a lump sum or income. This is a popular way for homeowners to access additional funds without selling their property. The loan would then be paid off when the house is sold, for example if you moved to permanent residential care or when you die.
What does “loan to value” mean?
A Loan to value is the percentage of borrowing you take out against your home. For example, if your house was worth £200,000 and you borrowed £180,000 the loan to value would be 90%.
What is the maximum “loan to value” on an Equity Release mortgage?
The maximum loan to value on an Equity Release mortgage is 29.5% of your property value.
At what age can I take out an Equity Release loan?
The minimum age that a person can take out an Equity Release loan is 55 years of age.
Why would someone need a mental capacity assessment to secure an Equity Release mortgage if they have a Lasting Power of Attorney in place?
If a person has a registered Lasting Power of Attorney (LPA) in place for financial decisions, their attorney(s) cannot use their powers under the LPA to secure an Equity Release loan on behalf of the client unless the client lacks the mental capacity to make this decision. This will need to be confirmed by completing a mental capacity assessment from a registered Health Care Professional. This assessment would be specific to the decision about entering into an equity release agreement and would ascertain the person’s understanding of relevant information including their understanding of what an equity release loan is, details of the property for which they are considering an equity release loan, why they wish to do this and details of the proposed loan.
If the person is found to be able to make that decision for themselves, then this assessment will confirm that they are able to proceed with making decisions about the equity release product themselves. If the person is found to lack capacity in relation to this specific decision, then this assessment will provide the evidence that a decision then needs to be made in that person’s best interests by their appointed attorney.
What if I have an Enduring Power of Attorney rather than a Lasting Power of Attorney?
Enduring Power of Attorney (EPA) documentation was replaced by the newer LPA documents in 2007. However, if a valid EPA was made (if it has been stamped and registered to indicate that the person lacks mental capacity to manage their own finances) then this can still be used so that the attorney can make financial decisions in the best interests of
that person. This includes applications for Equity Release mortgages: with a registered, valid EPA, there is no requirement for any further evidence of mental capacity.
When are mental capacity assessments required for Equity Release mortgages?
Mental Capacity assessments are normally required when there is a question over a person’s mental capacity to enter into an Equity Release agreement. A person will need to be able to
understand, retain and weigh relevant information, such as why they might need an equity release loan, what other options might be available, details of the property that the loan will be secured against, details of the lending company and the terms and conditions of the product offered.
The client may have a diagnosis of cognitive impairment. Equally, they may have no such diagnosis but their solicitor, equity release advisor, financial advisor or mortgage underwriter may raise a concern in respect of their client’s ability to make this decision.
They would then advise the client or their attorney that a mental capacity assessment will be required to ascertain whether the client has capacity to make this decision for themselves.
What happens if the person being assessed does not have mental capacity to enter into an Equity Release agreement?
If a capacity assessment is completed and the client is found to lack capacity to enter into an Equity Release agreement, they would not then be able to make this decision for themselves. In such cases, the person that is dealing with the Equity Release loan application will check to see if there is a valid EPA or LPA in place.
They will then liaise with the person’s attorney(s) to proceed with the equity release mortgage application, if it is deemed to be in the person’s best interests.
TSF Assessments Ltd are frequently asked to assess a person’s mental capacity to enter into an Equity Release loan agreement. The criteria for capacity is taken from the Mental Capacity Act (2005). The assessment examines whether someone understands, recalls and weighs all the relevant information to be able to make an informed decision about entering into the loan agreement.
We understand that it is imperative to have an efficient service when assessing mental capacity for an Equity Release loan, as there can be tight deadlines on loan offers. Our Equity Release Video Link assessments provide professional, quality reports that are produced in a timely fashion. If you require a face-to-face report please contact our office for a quotation, or for a video link assessment please complete the contact form below:
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