Property values have soared in recent times. It is possible to release some of this profit without selling your home.
One way of doing this is by using an equity release plan, which could give you the means of providing you with the cash to boost your current standard of living.
The Basics
What is Equity Release?
How does it work?
Types of Equity Release
Lifetime Mortgages
Home Reversions
Points to Consider
Getting Help
Frequently Asked Questions
The Basics
What is equity release?
Equity release is a way of getting cash from the value of your home. These schemes can be helpful in certain circumstances but are not suitable for everyone. For example, they can be expensive and inflexible if your circumstances change in the future and may affect your current or future entitlement to State benefits.
How does it work?
One way is to borrow a lump sum secured against your home. Another way is to sell part - or all of - your home to give you a regular income or lump sum, or both. You can continue to live there.
You will most likely need to have paid off your mortgage, or have a very small outstanding mortgage to qualify for an equity release scheme.
Types of Equity Release
Lifetime Mortgages
A loan secured on the borrower's home (a mortgage) is made to generate an income. Interest payments are added to the capital throughout the term of the loan, which is then repaid by selling the property when the borrower(s) die or move out (perhaps into a care home). The borrower retains legal title to the home whilst living in it, and also retains the responsibilities and costs of ownership.
Home Reversions
The borrowers sell all or part of their home to a third party, normally a reversion company or individual. This means all or part of their home belongs to somebody else. In return, the borrowers receive a regular income or cash lump sum (or both) and they continue to live in their home for as long as they wish
Points to Consider
There are several points to consider carefully before taking out an equity release plan. These include:
- The cost of compounded interest over a long period.
- The impact on any inheritance you may wish to leave.
- The effect on any welfare or tax benefits you currently receive or may be entitledto receive in future.
- There may be alternative ways of releasing cash e.g. downsizing or obtaining grants for essential repairs or improvements.
- Participation in an equity release plan should be viewed as long-term.
Getting help
Firms that give financial advice have to be regulated by the FSA, or be the agent of a regulated firm. Regulated firms and their agents are placed on the FSA Register and have to meet certain standards. Always make sure that the firm you use is on the FSA Register and is allowed to give financial advice before handing over your money. If they aren’t regulated by the FSA and things go wrong, you won't have access to the complaints and compensation procedures.
An adviser should only recommend a lifetime mortgage that is right, and suitable for you based on the information you give them.
You don't have to take advice before choosing a lifetime mortgage. But remember this is a complex area and you should seek independent legal and financial advice if you’re not sure about anything.
Bear in mind that if you don’t take advice and the product you choose turns out to be unsuitable, you will have less grounds for complaint.
Frequently Asked Questions
How much can I borrow?
How much companies are able to advance to customers is based on a variety of criteria including the value of your home, your age and gender when taking out the plan. The older you are the more you will be able to borrow as your life expectancy is shorter. As a guide, between 20-40% of the property value would usually be available at the outset.
I'm in poor health, can I borrow more?
Because the lump sum available from an equity release scheme is based upon a number of factors, one of which is life expectancy, you may be able to apply for enhanced terms. For further information please speak with your financial adviser.
Should I release the maximum cash sum I am allowed?
You should only take the maximum amount if you really need it. The more equity you release from your home the higher the cost to you. If, having taken an initial lump sum you think you may need more money in the future consider the a flexible mortgage option, which allows you access to a Cash Reserve from which you could withdraw more monies as and when you require.
Who will own my property once the equity release plan is completed?
Lifetime Mortgages - the ownership of the property always remains with you.
Home Reversion Plan - part of the ownership of your home will belong to the lender.
How does the rolling up of interest work?
On lifetime mortgages no repayments are made through the period of the loan. Instead, interest is added to the amount owed each month and repaid when the loan is redeemed. Interest is charged at a fixed rate, applicable at the time of application, calculated daily and added to the loan each month.
Does interest roll up the same way for the Flexible Mortgage Option?
Yes. However, by choosing a Flexible Mortgage Option you may pay less interest over the life of the plan. This is because you may choose to take a lower initial lump sum and make future withdrawals only when required. Interest is only charged on the amounts you have borrowed.
Will I be responsible for the upkeep of the property?
All our equity release schemes require you to ensure that:
- your property is maintained and kept in good repair.
- all property related bills are paid by you.
What happens if I want to move house?
If you decide to move, you should be able to take your equity release plan to a new property, provided it meets our lending criteria. If the new property is of a lower value, the terms of your equity release plan may need to be reviewed. Further details will be provided in a personalised illustration.
Please note that you will of course have to meet the costs of moving house.
Will taking out an equity release plan affect my tax position or my entitlement to certain state benefits?
It is important that you discuss these matters carefully with your financial adviser as depending on your personal circumstances it could affect both.
Can I take more if my property increases in value?
Further advances are available, generally after 3 years and subject to a survey and the prevailing lending criteria at that time.
Do I need to involve my family when making a decision?
Whilst not a requirement, we do feel it is important to consider discussing your plans with your family as any future inheritance will be affected.
