Equity release is a way of releasing the wealth tied up in your property without having to sell it and move to another home. You can either borrow against the value of your home or sell all or part of it in exchange for a lump sum or a series of lump sums as some plans may give you the option to “draw down” further funds at a later date, depending on your individual circumstances and needs.
Equity release is designed to help customers aged 55+ who either own their property outright, or have mortgages left to repay. They may decide to “release equity” in their property – that is, take out a loan or sell part of the value of the property – there are flexible options available – some schemes allow the interest to be “rolled up” and thus remove monthly repayments or some allow you make monthly interest payments and convert to a roll-up scheme later – it is worth exploring all options available to your personal needs.
What types of equity release are there?
There are two main types of equity release: Lifetime Mortgages and Home Reversion plans. Both types of plan are regulated by the Financial Conduct Authority (FCA). By using an equity release product, a home owner can draw a lump sum or regular smaller sums from the value of their home, while continuing to live in it.
A Lifetime Mortgage is a type of mortgage where you can choose to extract your funds in a single lump sum or in smaller amounts over time up to the maximum limit agreed with the plan provider. You can also elect to retain some of the value of your property as an inheritance for your family, meaning that you can benefit from releasing equity while ensuring you have something to pass on to your children.
You retain full ownership of your home and interest on the loan can be fixed or rolled up. The loan and the rolled up interest is repaid by your estate when you either die or move into permanent long term care. If you are part of a couple, the repayment is not made until the last remaining person living in the home either dies or moves into permanent long term care. In other words, both you and your partner are free to live in your home for the rest of your lives. With some plans you can make monthly interest repayments in part, or in full. That way, you can maintain the debt to the initial amount of the loan before interest. If you choose to make interest repayments, you still have the option to move to a roll up arrangement at a later date if you wish. There are even some lenders who can offer you the option to pay some capital throughout the plan but always discuss details with your plan provider.
How much can be released is dependent on your age and the value of your property. Some providers may be able to offer larger sums to those with certain past or present medical conditions. Some providers may offer larger sums to those with certain past or present medical conditions, or even ‘lifestyle factors’ such as smoking habit.
A Home Reversion Plan also allows you to access all or part of the value of your property while retaining the right to remain in it, rent free. With Home Reversion, the provider will purchase all or a part percentage of your house. You know precisely what portion of your property you have parted with and, equally, what has been ring-fenced for later use, possibly to leave in a Will. The percentage you retain in your property will always remain the same regardless of the change in property values, unless you decide to take further cash releases. At the end of the plan your property is sold and the sale proceeds are shared according to the remaining proportions of ownership.
Again, depending on your age and medical conditions, you may be able to access more funds. You will be provided with a tax free cash lump sum (or regular payments) and a lifetime lease, guaranteeing you the right to stay in your property rent-free for the rest of your life. There is no day to day interference and no restrictions in treating the house exactly as before; as a private home to live in freely.
Equity release plans are not right for everyone and it is important that you fully consider your options and receive independent financial advice before making a decision. It is also important that, if you do decide to use an equity release product, you choose one that meets your needs.
Remember that taking an equity release plan is generally a long term option. However, there are flexible plans available that may fit your varying needs and some will allow you to repay in the future without any penalties. A financial adviser can help you to choose the plan that is right for you.
What are the alternatives to equity release?
Before taking out an equity release plan, you should check what the alternatives are. You could visit moneyadviceservice.org.uk/debt for advice on debt. For instance, you may have other investments, savings or assets to draw on, or you may wish to continue some form of paid work. You could downsize to a smaller property or one of lower value – perhaps by moving to a different part of the UK where house prices are cheaper.
Downsizing is likely to give you maximum value from your home, but you may decide that you do not want to leave your home or move away from family and friends and you should consider the cost of moving. You may also want to think about renting a room in your home, or taking a loan from family and/ or friends.
Ultimately you will need to weigh up all the alternatives and, along with help and advice from your financial adviser, decide whether any of these alternatives meet your requirements.
Could this type of scheme help me reduce any inheritance tax?
The use of an equity release scheme will reduce the value of your estate. You should speak to your financial adviser if you are considering using equity release for this purpose.