Equity release3rd April 2018 11:43 am Comments Off on Equity release
Taking advice, both financial and legal, is key. Extracting money from your house could impact on some aspects of your finances that are not immediately obvious for example your eligibility for means-tested benefits before you die.
Equity release is where you release some of the value (equity) in your home to provide you with some cash now. You continue to live in your home. You need to have paid off most, or all, of your mortgage before you are eligible for equity release. Equity release schemes enable you to take cash from the equity built up in your home without having to make repayments until a later date. They are targeted at older home owners who may struggle to make regular mortgage repayments, and probably have little or no income from which to make regular repayments. The minimum age is typically 55 on lifetime mortgages and 60 on housing plans.
The Home Reversion Plan is one type of equity release. With these, you sell all, or part, of your home to a company in return for a lump sum, or regular income, and the right to remain living in your home.
According to the Equity Release Council, the trade body which includes Plan Providers and Financial Advisers, Home Reversion Plans have shrunk to less than 1% of the overall market; I shall therefore concentrate on Lifetime Mortgages.
Lifetime Mortgages allow you to take a loan on your property in return for a cash lump sum, or regular smaller sums. The money can usually be spent on whatever you want. The most popular sort of lifetime mortgage is the “drawdown” version, designed for those who do not need a large cash lump sum at the outset. Instead, a pot of money is set aside for you to draw from, as and when you need it, for example, assisting student family members for educational purposes or providing them with a deposit to buy their own home, without having to make any repayments until a later date. You only pay interest on the cash you release, which could save you a great deal of money. You continue to own your own home and you retain responsibility for maintaining it and paying the bills. The big “but” is that the mortgage company charge interest on the total amount of the loan, including interest that has already been accumulated, i.e. compound interest, which proves expensive when compared to traditional mortgages.
Following however, the scrapping of the rules that effectively forced many retiring workers to buy an annuity, equity release could increasingly form part of people’s long term planning; for example you may draw down your pension pot in earlier years of retirement, and then release money from your home later in your retirement.
When it comes to long term care planning, equity release can be useful if you are looking to fund care in your own home. If however, you think you will soon need to move to residential care, beware, many equity release arrangements have a clause that requires you to sell the property and repay the loan in full if you permanently move into a care home.
All Equity Release Council members offer a “no negative equity guarantee”, which means that no matter what happens to the housing market, customers will never owe more than the value of their home. That could however, still mean your family is left with little or nothing from your property when you die. Before you make a decision, do your research, talk to your family and take advice.
Many lifetime mortgage providers allow people to protect a percentage of the value of their property as an inheritance. But opting for an inheritance guarantee will reduce the amount you can borrow and may affect the interest charged.
The amount you can borrow depends on your age, the value of the property and sometimes your health. Typically, at age 65 you can borrow around one quarter of the value of your home, rising to one-third once you are in your mid-70’s. (These are not hard and fast rules but merely a guide). If you have certain medical conditions, you may be able to borrow a higher proportion of your property’s value to obtain a better interest rate via an “enhanced” plan. It is important to note that if a plan is held in joint names, your partner will be able to continue to live in the property under the same terms.
Overall Equity Release Schemes allow older people to unlock some of the value tied up in their property and are enjoying a surge in popularity – fuelled by problem “interest only” mortgages and parents keen to help their children on to the housing property ladder. Every scheme has its pros and cons. Whilst equity release can seem a very tempting proposition, particularly if you need some money now, it is important to consider all of your options. You should take independent financial and legal advice that will look at your specific circumstances.
Equity release is regulated by the Financial Conduct Authority.
Sid Garg is a Residential Conveyancer at Colemans Solicitors LLP, Maidenhead.
Categorised in: Residential Property
This post was written by Colemans Solicitors LLP