Many older home owners are property rich but cash poor, so unlocking some of the money tied up in property can be a good idea.
It’s estimated that the over 50s have £750 million tied up in equity in their homes. Equity
Release schemes have been developed to help them unlock some of this money without having to move home.
The reasons why many people choose to do this are many and varied, but may include some of the following:
• to gift money to children or grandchildren and be able to see them enjoy it
• to carry out home improvements, like building a conservatory to make retirement more enjoyable
• to pay for a new car to last through retirement, or pay for the holiday of a lifetime
• to repay a mortgage, or pay off loans and credit cards, giving financial freedom
There are two main types of Equity Release products; lifetime mortgages, which allow you to borrow money against your home, and home reversion plans, where you sell a share in your home. Let’s take a closer look at how these work.
Lifetime Mortgages have the following features:
• A mortgage is taken out secured against your home
• The money released is tax free to be used however you wish
• You still retain ownership of your home
• You make no monthly repayments
• There is no set term – these are mortgages for life
• The loan is repaid from the future sale of the property, usually when you die
• Interest is added to the loan so it increases over time
• A Drawdown Lifetime Plan gives you the flexibility to draw down the loan money as required, as interest is only charged on what is taken, which can reduce the overall cost of the loan
• An Interest Only Lifetime Mortgage allows you to pay the monthly interest off from your retirement income, which means the balance of the loan does not increase
Home Reversion Plans work like this:
• You sell all or a share of your home to a provider in return for a cash lump sum
• The provider owns the property
• You gain a lifetime lease which allows you to live rent free in the property until you die
• If you do not sell your entire home initially, it may be possible to sell further shares to release more money over time.
Who is eligible for Equity Release schemes?
Providers have different age criteria but usually the minimum age is 55 years old. The percentage of your home you can borrow against depends on your age, health and value of the property. Generally speaking, the older you are, the more you can borrow.
The pros and cons of Equity Release schemes
As with all financial schemes, there are advantages and disadvantages that need to be weighed up to decide if Equity Release is the right solution for you.
PRO It gives you access to the equity tied up in your home to spend as you wish.
PRO The money you spend will not be subject to Inheritance Tax so you can enjoy your wealth before you die.
PRO Over time the increase in your home’s value can help to offset the increase of the loan.
PRO For those whose interest only mortgages have come to term and have no way of repaying the initial loan, Equity Release schemes can offer a way out of having to sell up and move.
PRO All members of the Equity Release Council offer a “no negative equity guarantee” meaning you will never owe more than the value of your home.
CON Interest rates charged on Equity Release schemes are double that of a normal mortgage, meaning debts will double roughly every 10 years.
CON Debts run up against your home can mean there will be little or no inheritance money left for your family and friends.
CON Home reversion plans do not pay anywhere near the market value of your home.
CON If you decide to move or downsize you may not have enough equity left in your home if you have taken out a lifetime mortgage.
CON If you wish to repay your loan the early repayment fees can be as high as 25%.
CON You may lose out on means tested benefits, as you could lose eligibility for pension credit and council tax benefit.
The essentials of Equity Release schemes
For your complete peace of mind, the UK market for Equity Release is now regulated under the Financial Services Authority – these products are complicated so do be sure to seek the advice of an Equity Release specialist, such as John Whyte Equity Release Sussex.
Most major lenders have drawn up a voluntary code of practice for safe home income plans (SHIP), and your are highly recommended to protect your interests by ensuring your provider is part of this scheme. All SHIP schemes have a “no negative equity guarantee”.
Finally, make sure you discuss your plans with family and friends thoroughly before you decide to go ahead. Take your time and do not sign a contract if you do not understand exactly what you’re signing.
