For older homeowners who need some extra cash to supplement their pensions, equity release has a lot to offer. Equity release plans allow you to access some of the value tied up in your property, either as a lump-sum payment or a regular income stream.
But equity release is not always easy to understand and many people – quite rightly – have a number of questions about how the schemes actually work. Below, we look at five of the most common concerns that individuals have about equity release, and separate the reality from the myth.
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Concern #1: What if there's nothing left for my children to inherit?
Signing up for equity release will almost always have an impact on the value of the estate you can leave to your children or other family members. Equity release plans typically involve you borrowing money against the value of your home, with the cash – plus interest – repaid only when you die or move into care. Subject to your age and other lender's constraints, the full value of your house can be used to calculate how much equity can be released.
The longer the period between you signing up to an equity release plan and it being repaid, the more interest will accrue. However some equity release products now allow you to pay off the interest monthly. And there are other ways to ensure that you are able to pass on something to your children: one type of equity release scheme, known as a home reversion plan, involves you using just a part of your home's market value – say, 40% – to raise money. There is no interest to pay during the plan, but when it ends, the lender is entitled to 40% of your home’s current value, which is likely to have increased by that point.
This means that your family will be able to inherit 60% of what your property is worth, minus any sales costs or inheritance tax that might be payable.
The downside of home reversion, however, is that you will not be able to raise as much money as if you used all of your home for equity release.
Giving money as a gift.
Concern #2: What if I end up owing more than my house is worth?
One of the biggest worries for people thinking about equity release schemes is that their interest bill will increase to such an extent that the eventual debt will be greater than the value of the house and they – or their families – end up having settle the debt.
This would involve beneficiaries not only selling the home, but also having to find extra cash – either from the deceased’s estate, or out of their own pockets – to cover the cost.
Fortunately, if you arrange equity release with the more reputable providers, this should not be an issue. Most of the major equity release companies – and certainly all that are members of the trade body the Equity Release Council – offer their customers what is known as a “no negative equity guarantee”. This means that, however long interest is allowed to roll up for, the amount owed by the customer and their family will never exceed the value of the property the plan is linked to.
In these circumstances, it would be possible for the cost of the equity release plan to swallow up the whole of the property’s value: but this is the maximum that such a deal would cost.
Concern #3: Won't the equity release company own the whole house?
Many people view the equity release process as a form of selling their home – albeit while retaining the right to continue living in it. But in fact, equity release is just a form of borrowing against your property, like a normal mortgage.
The most popular type of equity release plan is called a lifetime mortgage – but instead of the capital borrowed, plus interest, being paid off monthly, these costs roll up and are repayable when the customer dies or moves into care.
Equity release and moving house.
As such, equity release companies do not own any of their customers’ houses, and there are no limits or restrictions placed on what customers can do to their own properties. Even at the end of an equity release scheme, the provider has no right to the property: they only have the right to be paid whatever sum they are owed at that point.
If surviving family members have sufficient funds, for example from other assets in the estate, they should not be forced to sell the home if they do not wish to.
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Concern #4: What happens if I need to go into a care home?
Having to move into a residential care home is one of the reasons an equity release scheme can be brought to an end, with the money that has been borrowed repaid to the lender.
However, there are a few points to bear in mind. Firstly, if you have taken out an equity release plan as a couple, the plan will continue as long as one of you remains in the home – so if one spouse moves into care, the equity release scheme will keep running if the other partner stays in their property.
The same applies if one partner dies: as long as the surviving husband or wife remains in the home, there is no obligation to pay off the equity release borrowing.
If both partners need to move into care, the home will probably be sold at this point to pay off the equity release loan.
A guide to equity release and care fees
If you or your partner needs to move into care after signing up for equity release, this could have an impact on the care bills you are asked to pay. On one hand, the equity release scheme may have generated a large lump sum or extra regular income, and this could be taken into account by your local authority in its means-test, leading to higher bills for you.
On the other hand, if you have borrowed money against your property, the council may take the view that you have a lower level of assets, which could count in your favour in the means test.
In any case, it is always wise to seek independent financial advice if you are thinking of signing up for equity release so you fully understand the pros, cons and potential implications.
Questions to ask when choosing a care home
Concern #5: Can equity release provide me with a fixed income for life?
While some equity release customers want to take a lump sum payment, perhaps to cover the cost of home improvements or to pass on to children, many people prefer to use the money to supplement their pension incomes.
It is possible to do this by using an option known as drawdown: this allows smaller sums to be taken on a regular basis. Drawdown doesn't mean you get a guaranteed income for life, as you would with an annuity – the value of your property, among other factors, will limit the total amount you can take. But you should be able to boost your monthly income over a reasonable period: your adviser or equity release provider will be able to give you an illustration of how this might work.
Could you take regular monthly payments from funds built up in your home?
One of the advantages of this approach is that you’re only charged interest on the money you have drawn down – so interest will accrue more slowly than it would on a lump sum payment.
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