What is Equity Release? Equity Release describes a range of products that are only available to homeowners over the age of 55. It allows customers to release some of the value of their property, as an alternative to downsizing or moving to another area, in order to boost their finances and help with living costs in later life. Many more people are turning to internet sites like this one to get a quick equity release quote to see how much they can raise. It is becoming increasingly popular with 21,000 new Equity Release customers in 2014, according to the Equity Release Council.
The most common schemes are Lifetime Mortgages. These work by allowing you to take out a loan secured against your home which would be repaid when you die or go into long-term care. You can decide to receive the loan as a lump sum or as regular smaller sums, depending on what best suits your needs. The funds can usually be spent on whatever you want, whether it be to do home improvements, help your children get onto the property ladder or to supplement your income during retirement. You continue to own your home and retain responsibility for maintaining it and paying the bills.
Home Reversion plans accounted for less than 1% of the Equity Release market in 2014.
- In this kind of scheme, you sell all or part of your home in return for a cash sum or a regular income, or both.
- You’ll typically get between 20% and 60% of the market value for your home as you retain the right to carry on living on the property under a lease and the buyer cannot sell it until you die or move into long term care.
- The terms of the lease will vary depending on which reversion you choose, but you may have to pay a nominal rent or you may have the choice of paying a higher rent in return for more money from the sale.
“Many retirees have more wealth tied up in property than anywhere else, so it is only logical that this forms part of their plan to enjoy a comfortable retirement,” commented Nigel Waterson, Chairman of the Equity Release Council, “There is a danger that people’s pension pot will be ‘here today, gone tomorrow’-but housing wealth is one constant that many in this generation can rely on for support”
What are the risks? - Home reversion plans are high risk products as they could have major implications for tax, benefits, inheritance and your long-term financial planning. You will no longer own your home, or only own a part of it, yet you will still be responsible for maintaining the property while you live there. You will also have to follow the terms of the lease and possibly make rent payments. Home reversions are usually suited to older homeowners, perhaps over 75, who wish to stay in their homes and do not plan for anyone else to benefit from the full value of the property.The ideal thing to do is speak to a specialist and get a quick quote based on your circumstances.
Lifetime mortgages can be an expensive way to borrow money - If you live for a long time as interest is charged on the amount you have borrowed, which you can either pay, or more commonly, gets added on to the total loan amount, and then further interest is charged on the interest. This could eventually mean that you owe more than the value of your home, unless you have a “no negative equity guarantee”.
NOTE: Taking out a lifetime mortgage will affect what you leave as inheritance and may affect your tax position and entitlement to means-tested benefits.
How much can I borrow? - The amount you can borrow will be dependent on your age, the value of your property and in some cases, your health. Your advisor will be able to talk through the different options with you.
How will it affect my family? - If you are planning to leave something for your children to inherit, many lifetime mortgage providers offer an inheritance guarantee which allows you to protect a percentage of the property value. However, this will reduce the amount you can borrow and may affect the interest charged.
All Equity Release Council members offer a “no negative equity guarantee” which means that regardless of the property market, you will never owe more than the value of your home. It could however mean that your family is left with little or nothing from the sale of your property when you die.
Are there fees to pay? - It’s also worth bearing in mind that there will fees associated with setting up a Equity Release plan to cover arrangement fees, legal and valuation fees, buildings insurance and advisor fees for their advice and help setting up the scheme. There may also be extra costs for paying off your loan early.
Our last word on the matter: As said above, its worth getting a quote from one of the major Equity Release specialsits to understand more if its right for you and if it could change your life for the better.
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Article by James Bradley – LeadPoint.co.uk. Disclosure: James Bradley works for LeadPoint.co.uk which introduces people to UK FCA regulated Equity Release brokers. Our company may receive a fee for introducing you to a Equity Release broker. Getting a totally quote is free and there is no obligation.