Home Equity Release Schemes
My views on Equity Release are that it should be the avenue of last resort when all else fails rather than a natural part of the post-retirement financial landscape, as many Advisers see it. However, I recognise that many people retiring in the 21st century are doing so with insufficient savings to maintain a reasonable standard of living, in which case, Equity Release may be the only solution. I see my role as acting as a “devil’s advocate” to ensure that, if you do apply for Equity Release from your home, you do so having considered all the possible options.
Here I will set out what is available and some of the dos and don’ts.
What is Equity Release?
Equity Release allows you to generate cash from the value of your home in the form of a tax-free lump sum or by drawing smaller instalments as and when you need them. The cash can be spent on anything you want without restriction and there is no interest, rent, etc., for you to pay during your ownership of the property (unless you elect to pay interest or repay some of the amount borrowed).
How does Equity Release Work?
The cash comes from either mortgaging or selling a proportion of your home, the latter known as home reversion, whilst retaining the right to live there as long as you want. The mortgage version is a Lifetime Mortgage, which is paid-off, together with the accrued interest, when your home is sold.
The home reversion option means that the ownership of your home is split between you and the home reversion company and the eventual proceeds are split in those proportions (unless you sell 100%).
What schemes are available?
- Lifetime mortgage: A loan secured against your property that allows you to release a tax-free lump sum with typically no monthly repayments. Unless you choose to pay some, or all, of the interest, compound interest is added to the lifetime mortgage loan throughout your lifetime. The loan plus the interest is eventually paid back when the home is sold, usually when you move into long term care or when you and your partner die.
- Drawdown Plans: Work in the same way as the lifetime mortgage, but with greater flexibility. Once you know the maximum amount you can release, after an initial release amount, you can then choose to ‘drawdown’ the rest of the cash in stages. The interest is only charged on the amount you have released so compounding is slower than if you released the full amount in one go.
- Enhanced Plans: Your health and lifestyle conditions may enable you to release more money from your home. Health issues such as diabetes, heart problems or high blood pressure are typical examples where you could qualify for an enhanced equity release plan. The same also applies to lifestyle factors such as heavy smoking or drinking. By choosing an adviser that cannot advise on this could mean you may lose out on thousands.
- Protected Plans: Allows you to guarantee an inheritance for your family.
- Home Reversion: You sell all or part of your home to a reversion plan company in exchange for a tax-free cash lump sum. You have the right to stay in your home with no rental payments for as long as you choose, this is why you will not typically receive the full market value for the share of your home that you sell. Any increase in property value is shared between you and the home reversion plan company, provided that you have not exchanged 100% of the value. When the plan comes to an end, the provider takes its percentage share of the sale proceeds from your property. Frankly, these schemes have fallen out of favour and you would be hard-pressed to find a provider.
- Deferred Payment Scheme: Whilst strictly not Equity Release, as such, the Care Act 2014 has made it compulsory for Local Authorities to offer a Deferred Payment Scheme to people with Eligible Care Needs, who don’t want to sell their home to pay for their care.
Are Equity Release Schemes a good or a bad thing?
The pros are:
- You receive a tax-free cash lump sum or instalments
- Typically no monthly repayments
- You can spend the money however you like
- You can stay in your home as long as you choose – for the remainder of your life
The cons are:
- You have to be aged 55 or more (applies to the younger of joint applicants)
- Your property has to be in the UK and have a minimum value and be in a good state of repair
- The amount of any inheritance you leave is significantly reduced
- Your entitlement to some means-tested benefits may be affected
- Equity release is intended to be a lifetime financial commitment and not meant to be used as a short term solution. If you wish to repay the loan, early repayment charges generally apply.
- Any existing mortgage has to be fully repaid as a part of the exercise.
- The scheme terminates upon death or entering care (2nd event for a couple).
To fully understand the features and risks of an Equity Release scheme, you should ask for a personalised illustration.
What should I watch out for when considering an Equity Release scheme?
Do you really need to do it? Have you considered all the options? Have you discussed your financial concerns with your nearest and dearest? Have you claimed all the State and Local Authority Benefits to which you may be entitled? Have you thoroughly reviewed your budget and identified all the realistic savings you can make?
If Equity Release is right for you then ensure you seek independent advice rather than approaching an Equity Release provider or specialist Broker direct. The latter will just sell you something from their portfolio rather than giving you a range of options from the whole market.
Ensure the scheme provider recommended is a member of the Equity Release Council (formerly SHIP – Safe Home Income Plans), which is supported by the leading providers of equity release schemes who agree to the following points:
- Clarity in product literature, including costs, moving house and tax situation
- A “no negative equity” guarantee
- Your legal work will always be performed by the solicitor of your choice
- The right to remain in your home for life
If you already have an existing equity release scheme, you may be able to:
- top-up the amount you have previously withdrawn, particularly if it is 5-years or more since your last drawdown.
- switch to a more competitive scheme. Switching plans can reduce the amount of interest that will accumulate over time. Some plans will have early repayment charges when you swap, but swapping to a plan with a lower interest rate could still prove more financially beneficial.
What are the risks?
Some of the risks of Equity Release are mitigated because all reputable Equity Release providers are members of the Equity Release Council (formerly SHIP), a consumer protection trade body set-up in 1991. The Equity Release Council sets-out strict standards in their code of conduct. However, you should always think carefully before securing debts against your home. Your home may be at risk if you do not keep up repayments on a mortgage or any other debt secured on it.
How much can I borrow?
The amount that you can release is quite subjective and there are no general rules. It is mainly based on your age and property value. The amount that you can release also depends on product providers, depending on such things as property value, age, location, health, etc. In recent years, the amounts available have reduced because of a number of factors, including our longevity and the slowdown in house price inflation (outside London and the South East).
Ask me to provide you with an estimate of the amount you could release by including your date(s) of birth, home value and post code when completing the form below.
What next?
If you are considering Equity Release and you want uncompromised, objective advice then contact me today using the form below.
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0800 074 8755info@clivebarwell.co.uk