Equity Release

Equity release is a means of releasing money from the value of your home, either as a lump sum or as a new monthly income. This is done by retaining the use of your home but using its value to generate a new source of earnings. With house prices rising and retirement income diminishing, it can be a tempting notion for those who wish to boost their income later in their life.

It can be especially appealing for those who are asset-rich but cash-poor, as it essentially involves converting your highest-value asset – your home – into a new source of regular income. However, equity release schemes are notoriously complicated; sometimes do not offer value for money, and usually come with many hidden costs and risks. Therefore equity release is not for everyone.

We look at the potential benefits and drawbacks of releasing equity from your home.

How does it work?

When you release equity from your home you will take part in an equity release scheme. There are numerous different schemes available on the market so you will have to seek professional financial advice before deciding which one you’d like to go with.

With most equity release schemes you will be borrowing money against the value of your home, with this money being repaid when your house is sold – usually when you die or move to a care home. These schemes work on the principle that you will be lent part of your home’s value in return for a share of the proceeds when your home is sold.

What equity release schemes are available?

There are 2 main equity release schemes on the market at the moment.

Home reversion schemes

If you take part in this kind of scheme you will sell your home (or a share of it) to a home reversion company, in return for a lump sum or a regular monthly income. If you decide to sell the entire value of your home you technically become a tenant, but have the right to live in your home rent-free for the rest of your life.

The home reversion company gets a payout either when you die or when the property is sold. If you sell your whole property to the reversion company, you’ll typically get between 30% and 50% of its value, the maximum usually being about 60%. Older people will get more than younger people, and men will get more than women, because of differences in life expectancy.

The benefits of releasing equity in this way are that you won’t have any ongoing repayments to make, and you’ll know at the outset what share of your home you’ll be leaving to your family (as long as you only sell a share of your property to the reversion company).

You also may get a bigger payout if you are a smoker or suffering from a serious illness as, rather morbidly, you’re likely to have a shorter life expectancy. However, reversion companies can be quite selective about the houses they take on, so there is a chance your home may not be eligible for a scheme of this sort.

Lifetime mortgages

A Lifetime Mortgage is a long-term loan secured against your home. There are different types of lifetime mortgage to suit you, so you can either release a lump sum to spend now or choose to take a smaller amount now, leaving the rest to spend in full or in part later.

The different types of lifetime mortgages are:

  • Drawdown plans - Drawdown lifetime mortgages work in the same way as lifetime mortgages but you can then choose to ‘drawdown’ the cash in stages as and when you want to.
  • Enhanced plans – If you or your partner have any qualifying health conditions or lifestyle choices you may be able to release more money from your home.
  • Protected plans – If you want to guarantee an inheritance for your family this is possible with some lifetime mortgages.
  • Interest payment plans – Interest-payment lifetime mortgages work in the same way as a lifetime mortgage, however you are able to make regular payments on the interest that accrues over the lifetime of the loan.

Key features

  • You retain full ownership of your home.
  • This plan enables you to take a lump sum from your property.
  • There are no payments to make, unless you choose to pay the interest each month.
  • The interest that accrues rolls up and is added to the loan. This is called compound interest.
  • Some plans allow you to guarantee an inheritance to your estate.
  • The money can be used for any purpose and can cover specific expenses such as general living expenses, home improvements or to help family members onto the property ladder.

As you take the money in one lump sum, interest accrues on the full amount from the day you borrow it – regardless of when you use the money. If you don’t need all the money straight away you could save thousands in interest with a flexible lifetime mortgage by utilising the drawdown facility.

Things to consider before taking an Equity Release plan out.

A cash lump sum or income from an Equity Release Scheme may reduce the borrowers’ eligibility to state benefits – if we feel that any of your benefits would be impacted or your tax status changed we will advise you of this.

Equity Release will reduce the value of your estate and may leave nothing to pass on as an inheritance – We would recommend that you discuss this with your family before making a decision.

Equity Release could affect your entitlement to means tested benefits. 

If you choose to proceed our typical fee would be £995 which would be payable on completion.

 

This is a lifetime mortgage, to understand the features and risks, ask for a personalised illustration