Over the years, we have had many questions about equity release schemes. Having reviewed all the questions asked, we have refined them to seven key questions. These are the questions most people need to resolve before they commit and move forward with some form of equity release. So if you are considering generating some cash from your home read on.
What is Equity Release?
Equity release schemes are ways for older people usually fifty-five or over to use their home/ property to get them some cash. There are many schemes and providers. As a significant financial decision, possibly the last major such decision you make, you must get it right the first time.
Broadly speaking equity release comes in two flavours:-
The most common equity release scheme is the lifetime mortgage. This type of plan allows you to borrow against the equity you hold in your home. Usually, you have to be over fifty-five. The interest rates are either fixed or capped. Typically there are no repayments during your lifetime. This knowledge gives you an idea of the rate at which your debt is mounting. The mortgage becomes due on death and proceeds of the house sale, clear it. The compounding effect of the interest and lack of payments mean the mortgage debt mounts rapidly. The plan has an impact on your estate.
There are some variations, where the money raised is paid in stages or repayments are allowed.
The home reversion plan is more what people think of as equity release when we have spoken to them. Essentially you, the homeowner(s) sells the plan supplier a share of your property at a discounted rate, to reflect their risk and the time they will have to wait to see a return. You maintain the right to live in the property.
For example: if your house is worth £280k and you want to raise £50k (circa 18%) you might have to give the financial institution a steak worth £100K or 36%. The equity release company are speculating on various factor when calculating the percentages; life expectancy, property growth values etc. The complexity means it is difficult to get quotes as different companies look on the actuarial data in different ways.
Finally, the older you are, the better the deal you are going to get. Plans are available from age sixty-five though some are as low a sixty.
Are we eligible for an Equity Release Plan?
As with all things, there are always hurdles to overcome in the pursuit of getting a decent plan. However, they are not as tricky as a house purchase mortgage or a re-mortgage since no repayments are due to the company until death.
The first criteria are age; fifty-five for a lifetime mortgage plan and 65 for a revision plan, if a couple both of you. The property needs to be in the UK and your principal residence. A survey will be required so it must be in a reasonable condition. Preferably with no dependents living in the house with you.
Also, you need to have equity and title in your property and.
How Much Money Could we “release”?
There are no set rules on this. The amount you borrow for a lifetime mortgage plan or release on a Revision plan depends on several factors.
The main factor determining how much you can borrow/ release is age. The provider will set a ceiling percentage of the property value. The ceiling is calculated based on age and or health of the applicants. Older and less healthy applicants are allowed a higher ceiling and borrowing more. Typically someone you will be able to borrow less than half of the property value for older applicants with health issue could borrow 60%.
Home Reversion Plan
The same factors apply, health and age. The older and less healthy you are the lower the discount required on the percentage you wish to release. A younger applicant in good health with good life expectancy might only get 20% of the share they want to release. An older applicant with poor health and a limited life expectancy could get 60% of the part.
For either pan, as you can see, the cash that could be made available is very much dependant on your age and health. There is only one way to get an accurate estimate of what could be available approach a specialist to discuss your particular circumstances.
Is Equity Release a good idea for us?
Equity release of either type is a way of raising some cash and possibly reducing your outgoings, by paying off cards, loans mortgages etc. So it is particularly useful when you get to retirement age if your pension provision is not very good. The money can be released in stages, very useful during retirement.
|Lifetime Mortgage||No Need to moveNo monthly paymentsNegative Equity GuaranteeLow-Interest RatesNo Inheritance taxFlexibility||Compounding interestHigh Penalties to changeState Benefits may be lostCan’t use the house as collateral again|
|Home Reversion Plan||No need to moveThe lump-sum is tax-freeAlways have a proportion of house for beneficiaries||You will receive a low sum for the equity given upNo longer the sole ownerExpensive option if you pass early|
What Pitfalls Do We Need To Lookout For?
As with any financial scheme, there are risks and pitfalls.
Impact on benefits
Having an influx of cash can impact on your means-tested benefits is you receive them, particularly:-
- Pension Credits
- Council Tax Support
- Jobseekers allowance
- Income Support
- Income-related Employment and Support Allowance
- Universal Credit
Some disappear at retirement age anyway. The impact of “unintended consequences” is one reason why taking expert advice is sensible before committing to either type of plan.
Reduced Estate/ Legacy for dependants
The money you leave on death is impacted by Equity release lifetime mortgages build up debt rapidly as no payments are due. The debt is paid when the house is sold. This happens after the death of the last participant in the plan, or when/ if they have to go into care. This reduces the total value of the estate going to your beneficiaries
Loss of Control
If you own your house outright, you can make any decisions you want about the property. With either type of plan, this freedom is lost. The home reversion company owns a portion of the house. The lifetime mortgage company has a lien on the property.
Are There Any Alternatives to Equity Release?
Do you want to raise some cash but not use an equity release plan? There are a couple of options you can investigate.
Downsizing is selling your property and moving to a less expensive property that fills your needs but releases cash. Sometimes there are additional benefits of a smaller property, e.g. cheaper to run, less to clean etc. There is a lot to consider losing friends etc. but that is for another post.
The re-mortgage is not age dependant; basically, it is raising a mortgage against the property, but making payments, thus reducing the impact on your estate.
How Much Will It Cost Us?
Costs vary depending on the complexity of the matter and the amount required. Usually, the fees are calculated on a percent of the money raised, with a minimum charge. Some companies have a lower fixed price, but other charges may be higher. You need to see an expert to know.
How Do We Know We are Getting The Best Deal?
You need to locate a good broker who can assess which scheme will be best for you. Brokers in this area are all governed by the Financial Conduct Authority. Should anything go wrong, you have recourse to the FCA for help and potentially compensation.
Equity Release Council
All equity release providers affiliated to the Equity Release Council are bound to have minimum terms that include that:-
- you have until death or a move into permanent care to live in your home
- You can move properties (providing new property acceptable.
- The debt will never be more than the value of your home.