What is equity release?
Equity Release is the term to describe Lifetime Mortgages and Home Reversion Plans.
If you’re a homeowner aged over 55, Equity Release could help you to free, or ‘release’ equity from your home so that you’ve got extra cash to spend on the things you want or need.
‘Equity’ simply refers to the difference between what your property is worth and any outstanding loans, such as a mortgage loan secured on the property. Here are a couple of examples:
Your house is worth £300,000. You have retired and paid off all your debts, including the mortgage. Therefore, your equity is £300,000.
You may have bought your house some time ago for £200,000 with the help of a repayment mortgage of £50,000. The value of the house has now gone up to £300,000 and the outstanding mortgage is £20,000. Therefore, your equity is now £280,000.
It’s entirely up to you what you spend your equity on and how you receive it – you might want a one-off lump sum, or you might choose regular instalments.
All monies released from an equity release arrangement are free of tax but be aware that financial gifts may have an impact on your inheritance tax in the future. We will advise you of any implications if it is your intention to financially support a family member.
Equity Release is not designed to be repaid in your Lifetime and may prove expensive to repay in the short term. Contracts with fixed early repayment charges are available and we can provide you with information about these options during our free initial consultation.
How much can I borrow and what will it cost?
The amount available to you to borrow under an equity release arrangement is dependent on two factors – Your current age (or the youngest of you if it is a joint application) and the value of your home.
The older you are, the greater the amount which will be available to you.
The reason for this structure, is that equity release arrangements carry an interest rate. The key here, is that the interest rate is compounded each year. This means that the interest will be applied on top of the interest each year and will gradually increase over time (if no repayments are made against it). Therefore, is means that the debt will effectively double over a 16-17 year period (based on an interest rate circa 4%).
This can be alarming; however, you continue to own your property completely and could anticipate that house prices could also rise during this period. How much did you purchase your property for initially and what is it worth today? This is a simple way to review the potential impact of the compound interest on the value of your Estate upon death.
How safe is equity release? What are the guarantees?
We only advise on regulated equity release products. This means that they confirm to the standards set out by the Financial Ombudsman and the Equity Release Council.
The guarantees are:
Right to reside – you will never be made to leave your home. Advice is key to ensure that both partners are covered by this guarantee and it may require the additional of your spouse/partner onto the Title Deeds of the property.
All equity release plans are portable – You can simply move home and take the arrangement with you to another property. There are requirements involved and we will be happy to explain this process to you.
No negative equity guarantee – This means that you can never leave a debt to your children when taking out an equity release arrangement.
Why should I consider equity release?
More people than ever are now considering Equity Release because of factors such as:
• Asset rich but cash poor
• Reduction or delay in payments of your state pensions – many clients have had their State pension age deferred and this proves a challenge when considering when to retire?
• A financial gift to family to help them to get onto the property ladder
• Consolidate debts carried into retirement
• Inheritance tax planning
• Cover medical care costs
• Low income from private or company pensions – Your income may have been reduced upon the death of a partner?
• The possibility of a later life expectancy and your pension may not support you throughout your lifetime?
For many people though, they just want to improve their quality of life, and the most popular reasons for taking out Equity Release plans in recent years include:
• Repayment of interest only mortgages – The Banks are now looking to customers to ensure that the outstanding lump sum is repaid by the end of the mortgage term. Equity release can be a solution to this issue.
• Home improvements (new conservatories, central heating, double glazing repairs, garden improvements)
• Clear debts (credit cards, loans, reduce outgoings)
• Holidays, cruises and short breaks
• New cars, caravans, holiday homes
• Family treats (grandchildren’s school fees, gifts)
• Improve retirement or enable early retirement
• Private medical care or mobility items (scooters, stair lifts)
• Visit family or friends overseas
• Help children onto the property ladder or to reduce their mortgage
• Reduce liability to inheritance tax
Am I eligible for Equity Release?
Each type of Equity Release plan has different eligibility criteria, so you must always check the details with the provider.
In order to qualify for an equity release arrangement, you must meet the following criteria:
• The youngest applicant must be over the age of 55 (most plans will start at this age)
• Your property must have a minimum value of £70,000, (some providers may require a higher minimum)
• Your property must be in England, Scotland, or Wales (excluding the Channel Islands and Isle of Man)
If your property is leasehold, the minimum unexpired term varies from provider to provider but at least 75 years is required. Many clients opt to extend the lease on their property via an equity release arrangement – adding value to their home and the value of their Estate.
Remember, it is always best advice to use some of your savings first to meet your objectives. If you can not achieve this via your savings or are concerned about reducing your savings to a low level, then please do either pop in and see us or give us a call to discuss.
As equity release will become a first charge against your home – with no requirement to pay back the loan in your Lifetime – all other existing mortgage or secured loans will need to be cleared via the equity release arrangement
Some types of homes are not suitable security for Equity Release plans, including mobile homes, park homes, houseboats, and properties with agricultural or forestry ties.
However, equity release is now available on second homes or buy to let properties also.
Why should I seek advice?
One product does not suit all. Many equity release lenders have various features and benefits which may suit your requirements more closely.
Options available are:
• The ability to repay the interest applicable to the plan – either on a monthly basis or ad-hoc when it suits your budget
• Downsize Protection, if you move to another property which is lower in value than your current home
• Inheritance Protection. Are you helping one child financially? You can earmark a set amount for your other children at the same time to ensure that your gift is fair.
• Fixed Early Repayment Charges – Would you like to repay the equity release arrangement in the future? This may be from the sale of another property or downsizing to a cheaper home in the future. To avoid any additional charges, we can ensure your contract has a fixed early repayment charge from outset.
It is important to seek advice as every situation is different are you will always be in a unique position as a client. We always tailor our recommendations to suit your needs as there is such a wide range of providers and plans available that, without professional guidance, you could miss out on thousands of extra pounds by choosing the wrong one. Also, at a time in your life when you may be financially vulnerable, you need to be confident that your home and the Equity Release plan are both secure. There are other important factors to consider too, for example the financial welfare of your family or entitlements to state benefit.
We always encourage clients to include anyone who may help you in making the right decision for your needs. This could be your children or anyone that you have included in your will. The reason for this is that entering into an equity release contract should not be taken lightly and it’s important that when you do pass away that your nominated beneficiaries or your next of kin are aware of your decision to proceed with an equity release plan.
How do I make sure I am protected?
Equity release arrangements are highly regulated by both the Government and implemented by the Financial Conduct Authority, with guidance given by the Equity Release Council.
The Equity Release Council incorporated the SHIP (Safe Home Income Plans) standards and provides the following guarantees:
• You cannot lose your home whatever happens to house prices, the stock market or to interest rates
• The scheme must ensure that there will be no negative equity at any time
• The scheme will guarantee that you (and your partner) can stay in your property for the rest of your life and you must have the right to move home without penalty, subject to conditions.