Equity Release/Lifetime Mortgages/Home Reversion Plans will reduce the value of your estate and can affect your eligibility for means tested benefits.
Types Of Equity Release
There are two main types of equity release, lifetime mortgages and home reversion plans:
A lifetime mortgage is a type of mortgage where you choose to extract your fund through a single lump sum or in smaller amounts over time, to the maximum limit agreed with the provider.
With a lifetime mortgage you can elect to retain some of the value of the property as an inheritance for family members.
By choosing a lifetime mortgage, you retain full ownership of your home and the interest on the loan can be fixed or rolled up. The loan and rolled up interest is repaid by your estate when you die or move into long-term care on a permanent basis. For a couple it would be based on the last to survive.
Lifetime mortgages can offer the ability to make monthly interest payments in part or full, therefore maintaining the debt to the minimum amount before interest.
The amount released depends on your age and the value of the property. Some providers are able to offer larger sums to those with certain past or present medical conditions, or lifestyle factors such as smoking.
Home reversion plans
A home reversion plan 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 percentage, of your house.
You will understand precisely what portion of the property you have parted with and what has been ring-fenced for later use.
The percentage you retain in your property always remains the same, regardless of the change in property value, unless you decide to take further cash releases.
At the end of the plan your property is sold and the sale proceeds according to the remaining proportions of ownership.
Like lifetime mortgages, you may be able to access more funds, depending on your age and medical conditions. 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 would be no day-to-day interference and no restrictions in treating the house exactly as before, as a private home to live in freely.
What You Need To Know About Equity Release
From the information above, equity release may seem like a good option when you want some additional money but don’t want to move home. However, there are a number of important considerations:
Equity release can be more expensive when compared to an ordinary mortgage. When taking out a lifetime mortgage you will normally be charged a higher rate of interest than you would on an ordinary mortgage, and the debt can grow quickly if the interest is rolled up. It is worth bearing in mind that house price growth might also be evident.
The plan provider charges a higher amount of interest because they need to factor in safeguards. For example, a no negative equity guarantee (so you will never owe more than the value of your
home, regardless of interest payments due, and any changes in property value) and a fixed interest rate for the life of the plan. These safeguards mean the interest rate is different to an ordinary mortgage.
For lifetime mortgages, there is no fixed ‘term’ or date by which you are expected to repay your loan. The rate of interest of a lifetime mortgage will not change during the life of your contract, unless you take additional borrowing and then it will be only be applicable to that cycle of extra borrowing.
Value of home
Home reversion plans will usually not give you anything near to the true value of your home when compared to the sale value on the open market.
If you release equity from your home, you may not be able to rely on your property for money you need later in your retirement. For example, long-term care.
If you decide to move home and take your lifetime mortgage with you, if you decide to downsize later on, you may not have enough equity in your home to do so. In this instance you may have to repay some of the mortgage.
In addition, the schemes can be complicated to unravel if you change your mind.
Impact on state benefits
The money you receive from equity release may affect your entitlement to state benefits.
You will not usually have to pay income or capital gains tax on the amount you receive when it is released from your main home. However, tax may be payable on any further investment of the proceeds.
Fees / Charges
You will have to pay arrangement fees of £1,500 to £3,000. These will depend on the plan being arranged. There could also be additional charges.
If you change your mind, there could be early repayment charges to pay, although these would not apply on death or long-term care planning.
When you take an interest roll-up plan, there will be less for you to pass onto your family as an inheritance.
Before beginning to advise you and make any potential recommendations, your equity release qualified financial adviser will work with you to understand your specific circumstances and goals.
Your adviser will consider the following when determining the appropriate solution for you:
- The options of downsizing to release the money you need, or whether you want to release money from your property while staying in your current home
- Whether you wish to service the interest each month (like a mortgage for over 55’s) or receive the money required now, but not service it so the interest rolls up (Equity Release)
- The proposed interest rate, fees and charges
- Whether fixed early repayment charges are important to you
- The importance of estate planning and the selection of a solution which offers an equity guarantee, or a means of paying the ongoing interest
- If you require the flexibility to take more cash in the future
- Solutions with a high loan to value, if you want to take the money now and again in the future
- Drawdown solutions that allow you to take an initial lump sum but with a facility to take more later.
Find out More
For more information about equity release and the options available to you, speak to Curchods Mortgage Services specialist on Equity Release:
Simon Labrow, FPC, CeMap
This communication does not constitute advice and should not be taken as a recommendation to purchase any of the products or services mentioned.
Before taking any decisions we suggest you seek professional advice.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
The Financial Conduct Authority do not regulate estate planning.