If you are itching to change your lifestyle, clear debts or give your children a financial boost in life, equity release might appeal. However, there is no shortage of things to consider before unlocking cash from your home, as we explain here.
Equity release options
Broadly speaking there are two main types of equity release schemes for homeowners in England, Scotland or Wales. These are lifetime mortgages and home reversion plans.
With a lifetime mortgage, you can apply for a loan that’s secured on your home once you reach 55, although where two people are planning to take out a joint plan, the youngest must be at least 55.
You can chose a scheme that pays a lump sum, or one that pays smaller amounts – known as drawdown. This option can prove useful if you don’t know how much you expect to need, as you can take as little as you require and only pay interest on what you withdraw.
You can also take out an interest-only lifetime mortgage, which sees interest paid on a monthly basis. As with any lifetime mortgage, you retain ownership of your property until you die or go into long-term care, at which point the balance is to be repaid, usually out of the proceeds from the sale of your home.
The amount that can be borrowed will depend on your age and the value of your property.
Home reversion plans
The majority of those taking out equity release plans do so using a lifetime mortgage, however, an alternative way of releasing equity is to consider a home reversion plan.
Unlike lifetime mortgages, you would not retain ownership of your property if you took out a home reversion plan. Instead, you sell all or a percentage of your home to a specialist firm, receiving a lump sum, regular payments or both in return.
Although you no longer own the property, you are granted a ‘lease for life’, which ensures you can live at the property rent-free, until you die or go into long-term care. The property is then sold with the amount owing to the plan provider paid and the balance issued to the customer or their estate.
Home reversion plans can normally only be taken out if you are aged 60 or over.
What do people use equity release for?
The majority of equity release plans are provided by companies who are members of the Equity Release Council. All plans sold by Equity Release Council members include some very important safeguards to protect you and your property, these include a no negative equity guarantee, ie, you will never owe more than the value of your property and security of tenure, giving you the right to live in your property for the rest of your life or until you move into long term care.
The cost of equity release
Equity release may sound a simple way to free up some much-needed cash. But there are usually costs involved. You will need to employ a solicitor or conveyancer and there may be completion, arrangement and other administration fees. Valuations will be required and there could be early repayment charges if you choose to repay the loan early. For this reason always search for a reputable company and seek financial advice upfront.
Equity release offers one particularly attractive benefit. Since you are releasing capital, rather than income, there is no tax to pay. With a lifetime mortgage in particular, equity release could result in a lower inheritance tax liability, as the value of the estate is reduced. The flipside of this is that the amount released could affect the policyholder’s tax position and entitlements to certain benefits, such as Pension Credit and Council Tax Support.
If you are unsure, speak to a specialist adviser who will analyse your state benefit entitlement to ensure that equity release does not have an adverse impact on your circumstances.
Value for money?
Anyone selling their home to an equity release scheme provider through home reversion will get less than the market value – typically of between 20% and 60%. This reflects several factors, including the fact that the customer is free to remain at the property for the rest of their life. It also takes into account unknowns about how the property market will fair over time. For this reason it is best to get expert advice about different schemes, and review your options carefully.
Use our equity release checklist.
Equity release requirements
Equity release isn’t suitable for all people. In fact, not all will be able to take advantage of this type of scheme. For a start you must own your own home and the property must be in a reasonable condition.
If you can tick all these boxes, and you are at least 55 years old, you could find a scheme that fits the bill. But there’s more to consider than just whether you meet the general criteria. You should have a sound reason for wanting to secure debt against what’s likely to be your biggest asset.
Is equity release the only answer?
For example, you could be motivated to take out equity release in order to clear significant debts, make home repairs and improvements, or adapt your home to cater for a specific physical need, such as handrails or a stair lift. In these cases it makes sense to seek assistance first.
A debt charity could suggest a course of action, while help with repairs or home adaptations may be available from your local council. Equity release may still be the best option here, but the amount you need to unlock could be less.
More generally, you may have other assets you can draw on – such as investments or savings – instead of or alongside equity release.
Alternatively, you could be entitled to certain benefits, like Pension Credit or Attendance Allowance, which may make all the difference to your financial plans.
If you don’t mind the upheaval of moving, you could consider downsizing to a smaller and cheaper property. Of course, equity release offers you the ability to unlock equity in your home without the need to move.
Ultimately you will need to weigh up the pros and cons of all these different options and, along with advice from a specialist financial adviser, decide which of them best meet your requirements.
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