While there are a range of different schemes offering lump sums and/or regular income, they all work on the same principle: they lend you a part of your home’s value in return for a share of the proceeds when you die. In most cases you will need to be at least 55 years old, have no outstanding mortgage (or you will need to use the equity release money to pay down the existing loan), and own a property in reasonable condition. Equity release plans can be complicated products and are a major step for many people. Your house is almost certainly the most expensive asset you own and it is also your home, good advice is therefore essential.
Age Concern and the Financial Conduct Authority, the UK’s chief financial watchdog, both recommend getting independent financial advice before proceeding. An Independent Financial Adviser (IFA) will look at your overall finances to see if equity release is really the best option for you, help find the right type of scheme – bearing in mind that in some cases you could risk losing state benefits and may have to pay extra tax.
The two main types of Equity Release are lifetime mortgages and home reversion schemes. Over 95% of our clients elect to take out a modern form of equity release known as a lifetime mortgage. With this scheme, you release a proportion of the equity in your property whilst continuing to own it 100%. This means that you continue to benefit from any increase in your property value in the future.
Lifetime Mortgage – Interest Roll-Up Basis
Here you release equity from your property by way of a roll up mortgage. Interest is charged and then rolled up and added to the loan instead of you making regular repayments.
The interest is repaid when the property is finally sold, although you should check to see whether there is a redemption penalty if you repay the loan early.
Schemes charging interest at a variable rate could potentially be very risky if interest rates were to rise, as the overall debt would increase and could take up a far greater portion of the value of your property on its eventual sale. We only recommend fixed rate for life interest roll-up lifetime mortgages which are approved under the Equity Release Council (ERC) previously known as Safe Home Income Plans (SHIP).
The maximum amount of equity that can be raised is usually between 20 – 50% of the property’s value however this is dependent on your age.
Advantages
- Fixed or Capped interest rates are less risky
- No interest is payable while you are alive. All interest is deducted from the final sale of the property
- Older people or those with a shorter life expectancy can sometimes obtain larger advances
- Guarantee of no negative equity
- Can be taken as lump sum or income or combination
- You retain 100% ownership of your property (unlike home reversion)
- You may have the ability to draw further funds if a drawdown plan is selected
Disadvantages
- Compound interest results in amount payable on death being larger than if the interest was paid each month.
- Inheritance is not guaranteed
- Top-ups/drawdown facility is normally not guaranteed
Lifetime Mortgage – Interest Paying Basis
These are very similar in nature to standard lifetime mortgages on an interest roll-up basis but with one major difference, you have the option by way of either lump sum and/or monthly payments of reducing or ultimately negating the effect of interest roll up by paying the interest that is charged to the mortgage. You can either pay all of the chargeable interest or part of it each month.
You are therefore able to elect to pay the full interest from day one meaning that the balance outstanding will always stay the same as long as these payments are maintained but with the ability in later life to revert to interest roll-up in the event that your circumstances change.
Advantages
- Can negate interest roll-up altogether meaning your loan amount shall not increase (assuming interest payments are made in full)
- Fixed or Capped interest rates are less risky
- Interest roll-up occurs either partially or fully if you elect to not to pay the full interest payment each month in part or in full
- Older people or those with a shorter life expectancy can sometimes obtain larger advances
- Guarantee of no negative equity
- Can be taken as lump sum or income or combination
- You retain 100% ownership of your property (unlike home reversion)
- You may have the ability to draw further funds if a drawdown plan is selected
Disadvantages
- If compound interest applies it will result in amount payable on death being larger than if the interest was paid each month
- Inheritance is not guaranteed
- Top-ups/drawdown facility is normally not guaranteed
Home reversion schemes
These require the sale of all or part of your property to a reversion company, which will give you a lump sum to spend or invest as required.
Although technically you are selling part of your home, you retain the right to live in it for life and you can even move house whenever you choose. When you die the portion of the property sold reverts to the company, the remainder to your heirs. For example, if you pledge 40% of your property to the company, it will take 40% of the value of your property when it is sold. Any appreciation in value is divided according to the percentage of ownership.
You will not have to make repayments or pay interest to the reversion company – the company simply sells its portion of your property after your death.
One drawback with a reversion company is that it will not pay you the full market value for its share of your property. The amount you get depends on your, age, gender and life expectancy. The company will not receive any money back until you die, this is why some companies scale back what they are prepared to lend or offer higher amounts to people with impaired lives, for example those suffering from a serious illness.
Advantages
- Schemes are portable however you must move to property deemed suitable by the reversion company
- An amount of inheritance is guaranteed (unless full home reversion is selected)
- No negative equity
- Provided you do not sell the whole of your property you will share in any rise in the value of your property
- Possibility of extra advances
- Amount received could be used to clear outstanding liabilities therefore freeing up income
- Can be taken as lump sum or income or combination
Disadvantages
- Full market value will not be offered
- Not suitable for younger people because of the lower amounts offered or lower annuity rates
- Giving up full or partial ownership of your property
Your family
While equity release plans can be a good way of cutting inheritance tax bills, they will also reduce what your family will inherit. While it should ultimately be your choice whether to sign up to a scheme, it is probably a good idea to discuss it with close family members and/or anyone who might have expected to inherit your home. This may help avoid any unpleasantness or misunderstandings. If the property has been a family home for a long time, bear in mind that your children or other relatives may also have an emotional attachment to it. They may even have been thinking of living in the property after you die. Children or other relatives may be prepared to help you out financially instead of you taking out an equity release plan. They could then inherit the whole property. We can advise on any tax issues involved.
How to avoid any risk
Look for plans carrying the Equity Release Council Logo, (incorporating Safe Home Income Plans). SHIP is an industry body set up to promote safe equity release schemes. Companies who are members provide a number of guarantees, such as:
- The right to live in your property for life
- The freedom to move to an alternative property without penalties
- You will never owe more than the value of your home