Equity release makes it possible to obtain additional income using the value of your house and is typically available for those who are retired and are living on a pension, generally over the age of 55.
If you are over 55 and own your own home, you may be considering equity release to provide you with a steady stream of income, a lump sum, or both.
Equity release schemes allow you to obtain income from your home, while retaining the use of your house for the rest of your life. They are designed to release the equity (cash) tied up in your property, and have no fixed term.
The UK equity release market is largely made up of two types of equity release arrangements. These are lifetime mortgages and home reversion plans. Before starting an equity release scheme, you should consider which equity release plan best suits your specific needs.
Lifetime mortgages - allow you to take out a loan on your property in return for a tax-free lump sum, an income or a combination of the two. Much like a standard mortgage, the loan is secured against your property and you continue to own your own home.
The amount you can release depends on a combination of your age, health and the value of your property.
There are several ways a lifetime mortgage can work:
Roll-up – where the interest is not paid back on a monthly basis to the lender but rolls up over time. The loan and the rolled-up interest are repaid either when your home is sold, on your death, or if you move into long-term care. There are no repayments to make during the life of the loan and both members of a couple are covered, so if one goes into long term care before the other, the other party can remain in the house until they either die or move into long term care themselves.
You generally have the choice of receiving either a cash lump sum or money in smaller amounts as and when you want this is called a Flexible Drawdown. Your choice of product will determine how quickly the interest grows on the loan. Taking a Drawdown product may reduce the total interest cost over time and prove more cost effective than taking out a large lump sum at the start.
Interest Only – where you pay monthly interest on the loan and the loan sum is repaid when the house is sold, on your death or if you move into long-term care. In some cases it is possible to pay monthly interest only on a loan and then roll this up when it is no longer affordable to make monthly payments.
What Other Equity Release Schemes Exist?
Now regulated by the FSA, sale and rent-back schemes are another way of generating equity from your property. Sale and Rent back or Sale and Leaseback as it is sometimes known, entails you selling your home, usually at a significantly reduced value, and then renting this same home back which means you become the tenant. You would normally have an assured short hold tenancy agreement, which may be for 6 or 12 months. Customers who use these schemes are usually looking for a quick sale and often receive much less for their property than the market value. Usually, customers sign an assured short hold tenancy agreement that enables them to live in the property in return for a monthly rent, which may be increased in the future.
The provision of sale and rent-back or leaseback schemes are now regulated by the Financial Services Authority but do not fall under the SHIP code of conduct, produced by the Equity Release Council. These schemes can be sold by anyone without the need for specific qualifications so you cannot be certain that you are receiving the best advice available. There is also no security should the company go into receivership meaning you could end up being evicted from your home. Whilst on the face of it these schemes may look attractive it is important to fully understand the risks. Please see our list of do’s and don’ts if you are considering a sale and rent-back scheme.
Sale and rent-back schemes are very different to regulated equity release schemes offered by SHIP members, namely because you have no security of tenure and can be evicted from your home, even after selling at a reduced rate.
It is also possible to sell your property and rent it back on a lifetime lease. This option will give you more security of tenure, but you must be able to keep up your monthly rental payments. Lifetime leases are regulated by the FSA but do not come under the SHIP code of conduct.
Home Reversion Plans
Home Reversion Plans involve you selling all or part of your home to a company in return for a lump sum or regular income and the right to remain living there.
When you die or move into long-term care, the provider will be entitled to its share of the property’s value at the prevailing market rate. The balance of the property that you didn't sell goes to your estate.
The amount you can raise from a home reversion scheme depends on your age and the age of your partner but it tends to be between 35% and 60% of the market value of the property.
What Important Considerations Should I Be Making?
To understand the features and risks of equity release plan ask for a personalised illustration from your adviser. Taking out a lifetime mortgage could affect your tax position, your eligibility for means-tested benefits and ability to move or sell your property. An equity release plan will reduce any inheritance that you decide to leave. You should talk to your financial adviser about these risks if you are at all unsure.
It is important to think about other options that could help you financially before choosing an equity release plan. Here are some options that you should consider:
- Claim any state benefits you might be entitled to
- Check if your local authority can help you pay for essential home improvements
- Trace unpaid pensions you may have lost track of
- Use your savings, or sell your investments or invest for income
- Downsize property as a way to unlock the value of your home
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