Equity Release
What is equity release?
This explanation is courtesy of moneymadeclear.org.uk:
“Equity release describes a range of products only available to you if you are typically over the age of 55. They allow you to release the equity tied up in your home. The products have no fixed term and allow you to stay in your home for the rest of your life, unless you have to move into long term care.
These schemes can be helpful in certain circumstances but are not suitable for everyone. For example, they can be expensive and inflexible if your circumstances change in the future and may affect your current or future entitlement to State or local authority benefits.
When considering equity release, you may come across sale-and-rent-back schemes. Watch out as they are not a type of equity release.
It’s important to check whether there are other ways you could meet your financial needs before choosing an equity release scheme. Some ways might be to:
* claim any benefits you might be entitled to
* check to see if your local authority can help you to pay for essential home improvements
* trace any pensions you may have lost track of, using the Pension Tracing Service
* use your savings or sell your investments first, but seek advice before doing so
* sell up and buy somewhere smaller and cheaper (downsize). “
There are three main types of equity release:
Home reversion scheme
You sell your home or a share of it to a reversion company for a lump sum or in return for a monthly income (or a combination of both).
Technically you become a tenant, albeit with the right to continue living in your home rent-free (or sometimes for a nominal rent) for the rest of your life.
When the property is sold – usually when you die – the reversion company gets its payout. If, for example, you sold 50% of your property to the reversion company, it gets 50% of the proceeds – including any growth. If you sold 25% of your property, it gets 25% of the proceeds, and so on.
In addition, the reversion company will also only pay you a percentage of the current market value for the share of your property it buys. This is because you get to carry on living in the property until you die, and the company may have to wait years for its return.
If you sell all of your property to the reversion company, for example, you will typically get between 30% and 50% of its current value. It will rarely be more than 60%. The actual figure 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.
This is a lifetime mortgage or a home reversion plan. To understand the features and risks, ask for a personalised illustration.
Interest-only mortgages
You borrow a lump sum secured against the value of your home. You pay interest each month, but you have a lump sum to spend as you wish. The capital is eventually repaid out of the sale proceeds.
Lifetime mortgages
The lender gives you a lump sum or monthly income (or both). You pay nothing – the interest is ‘rolled up’ into the loan. The amount borrowed plus this interest is repaid out of the proceeds from the sale of the property after you die.
How much you can borrow depends on the value of your home and your age – the older you are, the higher the percentage of your property’s value you can borrow. Generally, you will not be advanced more than 50% of the value of the property.
This is a lifetime mortgage or a home reversion plan. To understand the features and risks, ask for a personalised illustration.
Important points
Your family
While equity release plans can be a good way of cutting inheritance tax bills, they will also reduce what your family will inherit.
While it should ultimately be your choice whether to sign up to a scheme, it is probably a good idea to discuss it with close family members and/or anyone who might have expected to inherit your home. This may help avoid any unpleasantness or misunderstandings.
If the property has been a family home for a long time, bear in mind that your children or other relatives may also have an emotional attachment to it. They may even have been thinking of living in the property after you die.
Children or other relatives may be prepared to help you out financially instead of you taking out an equity release plan. They could then inherit the whole property. We can advise on any tax issues involved.
Alternatives
You may have other assets or investments which could boost your income or give you the lump sum you need. We will to take a holistic view of your finances.
Consider, too, whether moving to a less expensive property might be a better way of releasing money tied up in your home – rather than letting an equity release company profit from your bricks-and-mortar investment.
Benefits
If you receive means-tested state benefits, these could be reduced or lost altogether – which in turn could mean having to pay more for things like dental treatment and glasses. Check the rules before you take out an equity release plan.
CHECK THAT THIS MORTGAGE WILL MEET YOUR NEEDS IF YOU WANT TO MOVE OR SELL YOUR HOME OR YOU WANT YOUR FAMILY TO INHERIT IT. IF YOU ARE IN ANY DOUBT, SEEK INDEPENDENT ADVICE.
There will be a fee for mortgage advice. The precise amount will depend
upon your circumstances, but we estimate that it will be £500.
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Registered office: DTE House, Hollins Mount, Bury BL9 8AT Company number 01967512 (England)
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