Equity Release
Equity Release
INTRODUCTION
If you are in your mid-50s or older, own your own home and want additional funds, then releasing some of the equity in your property might be a way of achieving this.
Many retired people who manage on a small pension and limited savings live in properties that, even with recent house price falls, have soared in value since purchase.
The average house price in England and Wales was £168,814 in September 2008 (Source: www.landreg.gov.uk/houseprices). A 40% release of equity at this value could provide, for example an annuity of £5,200 per annum. (Source: http://www.fsa.gov.uk/tables/ - based on male aged 65, non-smoker, no guarantee, level annuity.)
There are various types of equity release scheme available and this guide covers the two main ones, lifetime mortgages and home reversion schemes.
The schemes themselves are quite straightforward and relatively simple to understand. What is not quite so straightforward is the impact these can have on your future finances and the effect on your family. Age Concern and the Financial Services Authority 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 and, if so, help you 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. So, when deciding what is right for you, your financial adviser will help you think through the consequences of your decisions and consider alternative arrangements that might better suit your needs and wants.
SHIP
SHIP stands for Safe Home Income Plans. This is an industry body whose members adhere to a strict code of practice. Under this code, all members make a number of commitments to their customers:
- To provide a fair, simple and complete presentation of their plans.
- To ensure the client's legal work is performed by the solicitor of his or her
choice. - To state clearly the main cost to the householder's assets and estate.
- To provide a No Negative Equity Guarantee, meaning you will never owe
more than the value of your home.
LIFETIME MORTGAGES
These will generally involve taking out of a mortgage secured against the value of your home in order to provide a cash lump sum, regular income or both. Such schemes can be helpful in certain circumstances but are not suitable for everyone. Some of the advantages and disadvantages of lifetime mortages are follows:
Advantages
- There is no interest payable whilst you are alive, so you will get a higher income for the same sized loan than with, for example, a normal interestonly mortgage.
- Most loans are fixed-interest, so you can budget your outgoings.
- Plans are available to people as young as 55.
- The provider of a lifetime mortgage will be authorised and regulated by the
Financial Services Authority. - With Safe Home Income Plan (SHIP) approved schemes, the residual value of your property will never be less than nil, therefore there will be no debt to your estate.
- Many providers allow staged lending, so that you borrow only what you
need at a time.
Disadvantages
There will always be uncertainty about how much will have to be repaid at the end - and, therefore, how much will be left in the value of your property.
- Interest rates can be high.
- The higher the interest payments means that they can mount up quickly and will further reduce what your family will inherit.
- The residual value of the home upon sale could be very little or even nil, even though the lump sum you borrowed only seemed a fairly small proportion of the home's value at the time.
- You may not be able to get a top-up loan later.
HOME REVERSION SCHEMES
This involves the reversion company purchasing or arranging for someone else to purchase some or all of your property. You get the sale proceeds as a cash lump sum, although with some schemes the lump sum is invested to generate a regular income. Since the reversion company cannot re-sell the property until the earlier of your death or you move out, you will receive less than the market value for the percentage being purchased - typically 35% - 60%
Rates will be influenced, amongst other things, by the state of the property market at the time.
Generally speaking, the older you are when you start the scheme, the higher the percentage of the actual market value you'll receive for the portion of the property you are selling. When the property is sold, the reversion company receives the same percentage of the sale proceeds as that which they originally purchased. Your estate benefits from any rise in the value of any part of the property you may have retained.
Advantages
- No ongoing repayments to make, the reversion company makes all of its money when the property is sold.
- You know at outset what share of your home (if not its value) you will be leaving to your family.
- You continue to share in any rise in the value of your property (unless you have sold its entire value).
- You can take extra cash advances, depending on the amount you originally - If you are a smoker or have a serious illness, you may be able to get a bigger
payment.
Disadvantages
- The reversion company will buy at a discount to the current market value.
- The big discount at which the reversion company will want to buy makes these schemes less suitable for those in their fifties or sixties
- If you die soon after taking out a plan, you could effectively have sold off your house (or a share of it) on the cheap. Some schemes give families a rebate if you die within the first few years of signing up.
- Reversion companies can be choosy about the properties they take.
FEATURES OF EQUITY RELEASE PLANS
- Money released from the value of your principle residence is free of tax, although if the cash is then invested there may be tax to pay on any income or growth.
- They can give a lump sum, a regular income or both. The lump sum could be tens of thousands of pounds; the income boost will depend on the type of investment and your age and health.
- You don't have to move house or sell your home to unlock equity. With reputable equity release schemes there is a rock-solid guarantee that you will be able to continue to live in and enjoy your home until the day you die
- and in many cases still be able to leave something of the property's value to your family.
- Releasing equity, spending it or making the right kind of gift or investment can also be a way of cutting inheritance tax bills. Inheritance tax kicks in at 40% on everything of your estate value over £312,000 (2008/2009) including the value of your home. Equity release will not suit everyone. It is always worth considering whether funds could be raised affordably from other sources before going down this
route.
CONSIDERATIONS
Purpose
What do you want the money for and how much do you actually need?
Are there other, more suitable ways of raising capital or producing income, such as downsizing to a smaller property?
Family
Whilst no one has a right to inherit your estate, there is often an expectation and some of your family might have made their plans based on that expectation. A condition of most equity release schemes is that your home is sold when you die. So if you use your property for home equity release you will not be able to leave it to your family.
Are you living with a younger partner, relative or friend? Depending on the terms of the scheme, they will need to find alternative housing in the event of your death.
Does the scheme allow you to move house if you need to? One day you might want to move into sheltered housing or need residential care, or move to be nearer to your family.
Effect on benefits
If you receive cash from a home equity release scheme this may cancel out your eligibility for means-tested benefits or help with paying for care.
If money is really tight you may be better off finding out whether you qualify for means-tested benefits or other benefits such as Attendance Allowance or Council Tax Benefit.
If you need the cash for repairs or adapting your property you might be able to get help from your council.
GETTING EXPERT INDEPENDENT ADVICE
Getting expert advice could save you and your family a considerable amount of
time and stress.
Our advice is entirely confidential and we will:
- Discuss your overall personal financial situation with you
- Help you determine the required levels of capital or income required
- Advise you on the best way to obtain that capital or income
- If equity release is the solution, we will find the most suitable products for
you from the whole of the market place - Explain the effect this will have on your rights to potential benefits from the
state and the local authority - With your agreement, include your family in any discussions so that they understand and accept your needs for equity release As Independent Financial Advisers, unlike people working for one financial institution,we are duty bound to find the best financial products and plans to suit your personal circumstances from the whole market. If you would like to find out more about Equity Release, please contact us for more information.
These are lifetime mortgages and home reversion plans. To understand their features and risks, ask for a personal illustration.
For advising and arranging a Lifetime Mortgage or Home Reversion plan, we normally charge a fee of £495.