Introduction
Many people reach retirement without adequate funds to live their live to the quality they desire. Of these, many will be in the common situation of being asset rich but cash poor. In most cases this means that they have a home worth a substantial amount of money but they only have a small income to live on in retirement.
Rising property prices and inflation mean your property is probably worth much more now than when it was purchased. The present value of your property, excluding any mortgage you may still have outstanding, is referred to as equity. An equity release scheme allows you to access a proportion of this equity to spend as you wish, while continuing to live in the property. There are many reasons for doing equity release and you need to be sure why you want to release the money tied up in your property.
Examine All Your Options
Equity release marketing can be very seductive, but think carefully about whether you really want to take this route. These schemes can be helpful in certain circumstances but they are not suitable for everyone.
Taking out a suitable equity release scheme can make immediate and significant improvements to one’s overall quality of life. However, since it is likely to be the last major financial transaction that anybody enters into, it is essential that everybody considering such a step makes sure that they are fully aware of the financial and other implications before committing themselves.
The first step is to consider alternatives to equity release. The best way of releasing the equity in your home is to sell up and move to a cheaper property – swap your house for a flat. However, many people reject this option. If you have lived in the area for 20 or more years can be a huge upheaval. Then there is the cost of moving – stamp duty, removal costs and the expense of decorating the new home. Also, family may live nearby, and they may have good relationships with neighbours.
Most people with decent capital assets would think twice about borrowing money, But this logic can become cloudy where your house is concerned. You ought first to look at using your other assets.
If you have money sitting in a deposit account, check if you can improve your income by moving to an account with a better interest rate.
For those who have a portfolio of shares, this would be worth dipping into before they turn to equity release. People with substantial share portfolios often live in fear of capital gains tax, but it may be possible to cash in stocks without incurring too much of a capital gains tax liability.
Our Independent Financial Adviser should be able to help you with this.
Lifetime Mortgages
A lifetime mortgage is where a loan is secured against your home, with no regular repayments to make as the loan and interest are rolled up and compounded and usually repaid from the final sale of the property (usually upon death or when you go into long-term care).
Lifetime mortgages are by far the most popular type of equity release scheme, accounting for 95 per cent of sales.
Benefits
- You receive a cash lump sum to spend on whatever you want
- You keep ownership of your home, meaning you can continue living in the property and benefit from any rises in property prices
- You have the option to take some money as a lump sum straightaway and then potentially release some more at later dates
- There is the possibility of leaving some equity as part of your estate, depending upon the size and duration of your loan
- Lifetime mortgages are regulated by the Financial Services Authority
- Most companies offer “no negative equity guarantee” which means you or your estate never have to pay back more than your home is worth, whatever happens to house prices
Considerations
- You need to be at least 55 to qualify for a lifetime mortgage, and you need to own a property worth at least £40,000. A flat may qualify, but you will typically need 75-80 years remaining on the lease.
- Your debt will grow over time – however, this could be limited by only releasing the money you need – when you need it
- All the equity in your home may be used up, leaving nothing for your family in the future
- You can still move as long as your new home meets certain conditions
- Should you choose to repay your loan early there may be an early repayment charge, and you will have to pay an administration fee
- You don’t have to pay tax on the amount you borrow, but it may affect your entitlements to tax and welfare benefits
- Interest rates on lifetime mortgages are higher than on conventional mortgages.
Drawdown schemes allow people to take only what they need, with the flexibility to take an extra amount at a later date. The savings that can be made by using flexible drawdowns varies in each case but can be considerable over the lifetime of the mortgage. Drawdown is increasingly popular.
Home Reversion
A Home Reversion Equity Release arrangement enables you to sell all or a percentage of your home to a reversion provider, in return for a cash lump sum.
You can typically raise 20-30 per cent of their home’s market value in cash through a reversion scheme, in return for agreeing to hand over 50 per cent of the property’s sale proceeds when the plan ends. Greater sums may be released the older you are: a full reversion would give around 30 per cent at 65, rising to 60 per cent of the value of the property in your 80s.
Benefits
- You can receive a cash lump sum to spend on whatever you want
- You can continue living in your home rent-free
- You can release all or a portion of the value of your home
- By not selling all of your home, the remainder can be left to your estate
- Most companies offer an Inheritance Protection Guarantee which protects the value of your estate if you die or need to move into long-term care during the early years of the plan
- Most companies offer a House Price Inflation Guarantee which ensures you benefit if there is an exceptional increase in your property’s value over the natural life of the plan
Considerations
- You will not be paid the full market value of your property. The total amount paid to you will depend on how long you will live
- If house prices rise, you only benefit from the percentage you still own and have not sold to the reversion provider
- You may have transferred the ownership of your property, but you will remain living in your home
- It can be expensive to buy back the share of your property in the future, particularly in the early years of your plan
- You don’t have to pay tax on the amount you release, but it may affect your entitlement to tax and welfare benefits
- Your options may be affected when it comes to moving or selling your home
- The Financial Services Authority regulate home reversion plans
Things to Think About
Releasing the equity in your home is a big decision to make, and not something to do lightly. There’s only one way you can actually decide whether it’s right for you: by getting all the facts and understanding all the financial and legal obligations. So make sure there’s no rush during the process, give yourself time to consider all the options, ask as many questions as you want and talk it through with members of your family.
Involving your Family
We encourage family members to be part of the decision making process, and welcome their presence at any meetings.
Different Levels of Flexibility
Some plans offer more flexibility than others. Most lifetime mortgages allow you to take out one lump sum, so you start to accrue interest on the entire amount from the start. However, there are options to release money as and when you need it.
The Size of Borrowing
The amount you can borrow in an equity release plan is based on the value of your home, your gender, and your age when you start the plan.
Valuation and Completion Fees
You will be required to pay a valuation fee depending on the value of your property. The application fee and legal costs are deducted from the amount you receive.
Interest Rates
Lifetime mortgages usually bring higher interest rates than standard mortgages as the provider doesn’t receive any payments during the lifetime of the mortgage.
Upkeep of the Property and Household Bills
All plans require you to maintain your property and keep it in a state of good repair. It’s also still down to you to insure your property, and to pay all property related bills, such as utilities and council tax.
Early Repayment Charge
The contract taken up for equity release is intended for life. It’s a lifetime mortgage and not designed to end early. The lender will not receive any payment until the property is sold; so if you decide you want to repay the loan early, they usually make a charge to cover the costs incurred.
Finding the Right Advice
Equity release is an extremely important financial decision so you should take advice from a properly qualified financial adviser. They should also be able to advise you on the impact an equity release scheme may have on any means-tested benefits and your financial position in general, particularly your tax status. Crucially, they will be able to help you decide whether equity release is right for you.
Questions to Ask your Adviser
The Financial Services Authority recommends you ask your adviser the following questions before taking out an equity release scheme:
- What charges or fees will I pay?
- Will I have to pay income tax on the money I get and does it affect my other tax affairs?
- If I need an income, is it important it is stable and guaranteed?
- Which products will allow me to draw a regular income (some only offer lump sums)?
- If borrowing to invest – what interest rate will be charged; what return will I get on my money; could I lose my capital?
- What happens to my partner if I die?
- Can I lose my home?
Jargon Buster
Annuity:
A regular payment that is guaranteed for the rest of your life.
Capital gains tax:
A tax levied on profits from the sale of investments or real estate.
Drawdown:
A facility within a lifetime mortgage that allows you to release equity in stages, when needed, rather than as one lump sum when you commence the mortgage.
Equity:
The difference between the value of your home and any debts you have outstanding on it.
Equity release:
A scheme that allows you to access some of the cash tied up in your home without having to sell up.
Home reversion scheme:
A percentage of the homeowner’s property is sold to a reversion company in exchange for a cash lump sum. However, the resident retains a lifetime tenancy and the freedom to move home whenever they choose.
Independent financial adviser:
An individual or a firm that is licensed by the Financial Services Authority to advise on and sell financial products. Independent financial adviser must recommend the best products (from among all those available in the market) to suit a client’s circumstances. They are not committed to sell any single firm’s products.
Inheritance tax:
A tax levied on the estate of the deceased person.
Lifetime mortgage:
A percentage of the value of the property is released with a loan. Homeowners are not required to make any interest payments and the loan is repaid from the final sale of the property.
Negative equity:
This occurs when the house is worth less than the loan or mortgage secured against it.
Roll-up mortgage:
Another term for a lifetime mortgage. Refers to the interest that is ‘rolled up’ over the years on the loan.
