Equity Release
If you’re over the age of 55, equity release offers you a way to use the value of your home to raise money.
Equity release has to fit with your needs, circumstances and preferences, where the benefits need to outweigh the drawbacks and be more suitable than alternative methods of raising funds.
People may consider Equity Release for lots of reasons including:
- To provide an additional income
- To provide lifetime gifts to relatives
- For home improvements
- For holiday home purchase
- To fund long term care
You probably have other ideas – there is no restriction on how you use the funds.
It is advised that you seek Independent Legal advice before entering into a legally binding equity release contract.
Equity Release, Lifetime Mortgages & Home reversion Plans will reduce the value of your estate and can affect your eligibility for means tested benefits.
Types of Equity Release
There is a range of equity release schemes available on the market offered by reputable equity release providers, and they fall into two main categories:
- Lifetime Mortgages
- Home Reversion Plans
Each type of equity release scheme facilitates a different method of releasing the equity in your home, and there are various other useful features available to create the ideal equity release scheme for you, including:
Protected Equity
Many equity release schemes come with a no-negative equity guarantee, and in some cases there are plans which also enable you to protect a fixed share of the value of your home. For example, if you protected a 30% share in your home, you have a guarantee that a minimum of 30% of your property value is protected for you in later life or as inheritance for your beneficiaries.
Impaired Life
Some providers will allow you to release more capital from the equity release scheme if you suffer from one of a list of health conditions.
Income
Many equity release schemes allow you to release the equity in the form of an income, by releasing the capital in staged payments over your lifetime.
Flexible Drawdown
There are some equity release schemes available with a pre-agreed ‘cash reserve’. Like an overdraft, this is a facility which allows you to draw-down cash whenever you wish, so it’s ideal for generating funds when required for home improvements, maybe a new car, a special holiday, etc. Interest is only added to the amount drawn, so they can work out much cheaper than other types of equity release schemes, depending on your needs. Flexible Drawdown is a complicated area with both advantages and disadvantages. Please review the dedicated section on this subject within the Equity Release area.
Equity Release, Lifetime Mortgages & Home reversion Plans will reduce the value of your estate and can affect your eligibility for means tested benefits.
Lifetime Mortgage
How does it work?
A lifetime mortgage is a form of equity release scheme whereby a loan is secured against your property, providing you with a tax-free cash lump sum or a regular income to spend as you wish.
Although there are Lifetime mortgages where you pay the interest (and possible capital) as it accrues, commonly Lifetime mortgages are arranged on a roll-up basis, meaning that borrowers will not be required to make payments during the term of the loan, instead the lender adds the interest that accrues to the original loan amount. ‘Roll-up plans’ can be very useful but borrowers must remember that the amount of the mortgage debt can increase quickly due to ‘compounding’ – i.e. you will be charged interest on the original loan and any interest that is added to the loan account.
Interest is added to the lifetime mortgage loan throughout your lifetime, accruing at a fixed or variable rate. The loan plus interest is eventually paid back when the home is sold which could be when you move into long term care, or when you and your partner die. Subject to your age you can typically release between 18-50% of the value of your home with a lifetime mortgage.
ADVANTAGES
- Choose a cash lump sum or regular income, typically with no monthly repayments to meet
- You still own your home so all growth in the value (if any, of course) belongs to you
- Loans with ‘No negative equity’ guarantee are available
- Some plans enable you to guarantee an inheritance for your family
- Plans can be taken out as young as 55
DISADVANTAGES
- Inheritance amount will be reduced
- Interest rates may be higher than for normal mortgages due to the long-term nature of the loan.
- The amount owed on the loan can mount up quickly as interest is compounded.
- Early repayment charges may apply
- Tax position and certain state benefits will be affected
- You could raise a larger amount with a reversion plan, especially at a younger age
Please note: You can get interest only lifetime mortgages wherein you pay interest monthly, but lifetime mortgages are mainly offered as ‘rolled up’ interest. ‘Rolled up’ interest is paid off altogether in one final payment along with the total amount of your loan when your property is sold, as described above.
Equity Release, Lifetime Mortgages & Home reversion Plans will reduce the value of your estate and can affect your eligibility for means tested benefits.
Home Reversion Plan
How does it work?
With this plan you sell part of or your entire home to a reversion plan company in exchange for a tax-free cash lump sum and a guaranteed lifetime lease with no monthly repayments to meet.
You can stay in your home either rent free or by paying a nominal rent for as long as you choose and you can guarantee an inheritance to your beneficiaries. Both you and the reversion scheme company share in any increase in your property’s value, providing you have not exchanged 100% of its value.
ADVANTAGES
- No monthly repayments to make.
- You know what proportion of your home will be used at the outset.
- You can leave a fixed proportion of equity to your estate.
- Flexible home reversions now allow you to release the right amount for your needs today, whilst having a guarantee of further cash releases if or when required in the future.
- You benefit from any increase in value of the percentage of the property that you still own.
- May be available to those aged 55+ and you can typically raise more money from your home at a younger age with a reversion plan than a lifetime mortgage would allow.
- You’ll be able to release more money the older you are.
- You can usually still move home (subject to certain restrictions).
DISADVANTAGES
- You do not typically receive the full market value of the share of the property you sell. This is due to the fact that the reversion plan company gives you the absolute right to live in it rent-free for the rest of your life. They, however do not make their return on investment for a number of years.
- You only benefit from any rises in house prices on the proportion you still own.
- Reversion plans cannot usually be reversed as you are selling part of your home.
- Reversion plan providers do not usually guarantee further advances.
- If you choose to end the plan early, charges may apply.
- Your tax position and eligibility for means tested benefits may be affected.
Equity Release, Lifetime Mortgages & Home reversion Plans will reduce the value of your estate and can affect your eligibility for means tested benefits.
Drawdown Lifetime Mortgage
How does it work?
Similar advantages and disadvantages as a regular lifetime mortgage, with additional issues that are unique to this kind of equity release scheme. The main difference is that you don’t request the full sum of money available to you immediately. Instead, you decide on a maximum amount of equity you want to release, and ‘drawdown’ the cash in stages as and when required.
ADVANTAGES
- You are in control of your money as you can release cash when it suits you , or you may be able to request a monthly income with no monthly payments to make
- You retain full ownership of your home
- You only pay interest on the amount of equity released from your home, so interest could accumulate more slowly than with a regular lifetime mortgage
- Drawdown Lifetime Mortgage plans may be available to younger people (aged 55+)
- Some Drawdown Lifetime Mortgage plans let you guarantee an inheritance for your family
DISADVANTAGES
- Interest rates are usually higher than on a standard lifetime mortgage
- Reduced amount available to leave as an inheritance
- Interest grows quickly as it is compounded
- If you want to increase the amount of equity released beyond the original amount agreed, you would normally have to apply for a further advance, which is not guaranteed
- If you repay the lifetime mortgage loan early, you may have to pay an early repayment charge
- Your tax position and certain state benefits may be affected
Equity Release, Lifetime Mortgages & Home reversion Plans will reduce the value of your estate and can affect your eligibility for means tested benefits.
Home Income Plan
How does it work?
With a home income plan, equity is released through a lifetime mortgage or a home reversion plan and is automatically invested into an annuity that is built into the plan, to generate an income for life. A cash lump sum may be available in addition to an income, but the amount may be restricted.
An annuity is a plan that guarantees a series of payments in exchange for a cash lump sum. The income you receive will depend on prevailing annuity rates, your age at the outset and your gender.
The advantages and disadvantages of home income plans largely depend on whether the money is released through a lifetime mortgage or a reversion plan, however annuities have their own set of pros and cons:
ADVANTAGES
- A lifetime annuity guarantees that the income will be paid for as long as you live.
- Income can usually be taken on a level or increasing amount each year.
- With a home income plan annuity, you can usually get a higher income than would be payable from a standalone annuity.
- You may be able to take some lump sum in addition to the annuity.
- The older you are the higher the income.
- As interest is repaid automatically, the reduction in the home’s value is minimised.
DISADVANTAGES
- You are committed to an annuity as a means of extra income, leaving you no choice of alternatives.
- You can lose out by taking a lifetime income if you were to die soon after the plan is completed, unless the plan includes protection against this.
- You do not have the option of allowing the interest to build up, so the reduced annuity may not improve your financial circumstances greatly.
- Home income plans involve borrowing against your home and may work out more expensive in the long term than downsizing to a smaller property.
- Home income plans may affect your entitlement to state benefits and grants.
Equity Release, Lifetime Mortgages & Home reversion Plans will reduce the value of your estate and can affect your eligibility for means tested benefits.
Costs
Take into consideration that when entering into any type of equity release scheme there will be set up costs and ongoing costs which can include:
- Arrangement Fees payable to the lender
- Legal Fees
- Valuation Fees
- Maintenance costs – you are still responsible for maintenance of the property
- Insurance costs – maintaining adequate buildings insurance
Equity Release, Lifetime Mortgages & Home reversion Plans will reduce the value of your estate and can affect your eligibility for means tested benefits.
Alternatives to Equity Release
However, since equity release can be an expensive way to raise money when taking into consideration payment of arrangement fees or interest, you should also consider the following:
- Sell your home and live in rented accommodation This option involves selling your house and investing the proceeds in income producing investments. The income from these investments is then used to rent a property and for your living expenses. You would only really be able to generate sufficient income to live on if your property was sold for a large sum of money, so this option should only really be considered if your house is worth in excess of £400,000.
- Benefits entitlement Have you checked to see that you are getting all of the benefits you are entitled to? It may be that you are entitled to benefits that make equity release unnecessary. Also equity release could affect your entitlement to means-tested benefits so it’s worth speaking to your local authorities to consider these areas first. They may be able to offer you grants or assistance with essential home improvements and alterations that you would otherwise pay for yourself.
- Your Savings & Investments If you have savings or investments you may wish to consider this alternative.
- Rent out a room If your house is sufficiently large you might consider renting out a room to bring in regular extra income.
- A smaller home If your family have grown up and they are off on their own financial journey now, your current home may be too big for your needs and you could consider something smaller and more economical to run. In this case, you could consider purchasing a smaller property, leaving you with a lump sum on completion.
For further advice on Equity Release from experts that specialise in dealing with all aspects of wealth management, please contact us through our confidential online enquiry form or telephone 01327 317388
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