Equity Release
A growing number of retired people live with a limited income with little or no savings, people who have properties that have increased in value over the last 10 or more may be eligible to borrow a percentage of their property dependent on their age using an equity release plan. This type of product is suitable for people at or near retirement age.
Home income plans, home reversion plans and lifetime mortgages are all types of equity release plans. All of these plans enable you to release cash from your property depending on your circumstances and the value of your property. The original loan together with the accrued interest will be repaid on the sale of the property, the borrower going into long term care or on the death of the borrower.
How Equity Release Plans – How they work
There are a range of different schemes available offering lump sums and /or a regular income, they all work on the same principle; they lend you a sum of money from your home’s value in return for a share of the proceeds when you die.
There are a range of different schemes available offering lump sums and /or a regular income, they all work on the same principle; they lend you a sum of money from your home’s value in return for a share of the proceeds when you die.
In most cases you will almost certainly need to be at least 60 years old to qualify, and have no outstanding mortgage (or you will need to use the equity release money to repay the existing mortgage loan in full), and own a property in reasonable condition. Your property will probably be the most expensive asset you own; it is also your home. Good sound Independent advice is therefore key.
The Financial Services Authority (the UK financial services watch dog) and Age Concern, both recommend getting independent financial advice before proceeding.
A regulated Independent Financial Adviser (IFA) will look at your overall finances to see if equity release is really the best option for you and recommend the right type of scheme – bearing in mind that in some cases you could risk losing state benefits and may have to pay extra tax.
Equity Release plans – Key advantages
Equity Release plans can give;
* A lump sum
* A regular income
* or both
Money raised from the value of your main residence is free of tax, however if you invest the cash you may be liable to pay tax on any income or growth.
* A regular income
* or both
Money raised from the value of your main residence is free of tax, however if you invest the cash you may be liable to pay tax on any income or growth.
The lump sum raised could be tens of thousands of pounds; the additional income boost might be worth as much as a hundred pounds a month or even more.
You are not required to move house or sell your main residence to raise the equity. Using reputable equity release schemes they will provide a rock-solid guarantee that you will be able to continue to live in and enjoy your home until the day you die – and in many cases you will still be able to leave some of the property’s equity to your family.
Of course, if you are single or don’t have children or family to leave your property to, then equity release plans could seem an even more attractive concept.
The value of many properties means that Inheritance Tax (IHT) is no longer something only the rich have to pay. You must seek advice from your financial adviser as to whether your estate may be liable to IHT.
More people may opt to release equity from their properties while interest rates remain low, mortgages are paid off and house prices remain stable.
Types of Equity Release schemes available
Home reversion schemes
You sell a share, or all of your home to a home reversion provider for a cash lump sum or in return for a monthly income (or a combination of both). Your interest is protected by the formation of a lifetime lease which will guarantee you occupancy of you home for life.
When the property is sold – usually when you die – the reversion company gets its payout. For example, you sell 50% of your property to the reversion provider, it receives 50% of the proceeds of the sale – including any growth in the value of the property. If you sell 25% of your property, it gets 25% of the proceeds, and so on.
If you sold all of your property to the reversion company, you would typically get between 30% and 50% of its current value, rarely would you be able to raise more than 60%. The actual figure that you can raise will depend on your age (and your partner’s). Older people will get more, and men get more than women – because of differences in how long they are expected to live. And smokers can also raise more.
Interest-only mortgages
On the money borrowed against your home you will only pay interest each month; however you will have a lump sum to spend as you wish. The capital is eventually repaid out of the sale proceeds.
Home income plans
Previously these were the most popular type of equity release plans. A mortgage is secured against your home and the money is used to buy an annuity which guarantees you an income for life. The mortgage payments will be deducted from this monthly income. The original capital borrowed is only repaid from the sale proceeds, which is normally after you die.
Lifetime mortgages
A lender gives you a cash lump sum or monthly income (or both). You need pay nothing – as the interest is ‘rolled up’ into the loan. The amount you borrowed plus interest is repaid out of the proceeds from the sale of the property after you die.
Your age and the value of your property will determine how much you can borrow. Normally, a lender will not advance more than 50% of the value of the property.
Shared appreciation mortgages
These are not currently available but may become available again in the future. A lump sum is borrowed based on the value of your home; there are no repayments made until you die or the property is sold. Then the amount you borrowed is paid back plus an agreed percentage of the increase in the value of your home.
Equity Release - How to avoid risk
Look for plans carrying the SHIP logo (for Safe Home Income Plans). SHIP can be contacted on 0870 241 6060 is an industry body which was set up to promote safe equity release schemes. All companies that are members of SHIP provide a number of guarantees, which include;
*You will have the right to live in your property for life
*The freedom to move to an alternative property without penalties
*That you will never owe more than the value of your home.
*The freedom to move to an alternative property without penalties
*That you will never owe more than the value of your home.
If the scheme’s income comes from an annuity, you will get a better rate the older you are.
Equity Release – The costs
The equity release market has become more competitive. Interest rates on mortgage-based schemes, are still higher than those on ordinary mortgages. You will also be required to pay a valuation fee and legal fees on most equity release plans, although these may be refunded assuming you go ahead. You will remain responsible for repairing and insuring your home, and will still have to pay Council Tax. Reversion companies in particular will expect you to maintain your home to a reasonable standard so that they can protect their investment.
Can you move or sell up?
If you want to sell your house at a later date and move into somewhere smaller or more suitable for your needs you will need to check whether any plan you are considering taking will allow you to transfer the scheme to a new property as there may be a penalty if you end the scheme before death.
Equity Release Advice
Getting independent financial and legal advice before taking out an equity release plan is highly recommended by both the charity Age Concern and the Financial Services Authority, the UK’s chief financial watchdog. To get advice from a regulated adviser please complete the form at the top of the page and an adviser will call you to discuss you situation, with no obligation.