What is it?

Equity release is a term used to describe the action of raising money from your home without the need to move out of it

There are two main types of scheme in use at present:

 

Lifetime Mortgages

This is a loan secured on the home to provide either a lump sum or regular income at specific intervals.

The homeowner continues to own the title deed and the mortgage lender simply places a first charge on the property to secure their financial interest on sale.

As these mortgages are generally utilised to provide much needed funds, the compulsion to repay interest on the loan or repay the capital is normally waived.

Home Reversions

The fundamental difference is that with this option you sell all or part of your home for a capital sum or regular income.

To secure your right to live in the property, a lease is created so that you can remain in the property for the rest of your life, or until you move permanently into a care home or sheltered accommodation.

 

How does it work?

The interest due is added to the loan on a monthly basis

The compound effect means that the mortgage debt increases each and every month until the mortgage is eventually repaid

If the mortgage remains on the property for a number of years, the final mortgage outstanding including the accrued interest could leave little or no remaining funds for your beneficiaries.

The rate of interest is normally fixed from outset and can remain fixed for the life of the mortgage.

 

Will I lose my home? 

Safe Home Income Plans (SHIP) was launched in 1991 in direct response to the growing need for consumer protection

During May 2012, SHIP was re-launched as the Equity Release Council, broadening its membership to incorporate all aspects of equity release advice and product provision.

 

As well as providers, the new body represents financial advisers, solicitors, surveyors and other interested parties working in the equity release industry.

The SHIP Code of Conduct has been incorporated into the Council, which includes the following safeguards:

  • You have the right to remain in your property for life
  • Information presented must be fair, simple and complete
  • You have the right to transfer the equity release plan if you move to another eligible property
  • In addition to the financial advice you receive, you appoint your own independent solicitor to act for you
  • Your solicitor will sign a certificate to confirm that all the risks and benefits of the plan have been explained to you and that you have understood them
  • You will benefit from the No Negative Equity Guarantee – you will never owe more than the value of your home.

Financial Conduct Authority

The equity release industry is regulated.

This means that:

  • We are authorised and qualified to advise you on these plans;
  • We must present our illustrations in a set format, which means that they are comparable with those of our competitors.

 

What are the costs?

Legal costs – circa £850

It is imperative that you take independent legal advice before signing any offers.  Most lenders will insist on this and normally insist that the solicitor adheres to the Equity Release Council standards

Valuation – Depends on value of property (Ranges from £200 to £800 below £1million)

The prospective lender will want to check the state of the property before making a formal offer to lend.  This will take in to account future marketability, flooding issues, regional long-term prices to name a few

Some lenders offer free valuations

Product Fee – Range from Nil to £999 on average

Some lenders will make a charge for a preferential interest rate, or simply charge an Application Fee to cover their upfront costs

Financial Advisers – Nil or % based

Generally, advice firms will receive a payment direct from the lender.  However, on small loans, this might not cover the minimum fee and a separate advice fee might be levied

 

What if my circumstances change?

Lifetime Mortgages normally allow you to sell the property, repay the outstanding mortgage and interest, so you can move or downsize

Early Repayment Charges

Most (if not all) lenders levy an additional early repayment charge in the first 5-years (some will be longer)

Therefore, it is imperative to seek advice, so that you can decide the prospect of selling in future to downsize or get rid of the mortgage

The more (potentially) expensive early repayment fees are based on changes in the UK 15-year Gilt Index between the start of the mortgage and the time you decide to repay

The main issue with this option, is that the fees can effectively be zero or many thousands

Moving into a residential care home

Lenders normally waive early repayment charges if you sell the property to fund a move into a full-time residential care home

 

Inheritance Tax

  • The Lifetime Mortgage will reduce the amount you can leave to your chosen beneficiaries
  • Conversely, as it creates a debt on the estate, it could also reduce any Inheritance Tax that may be due
  • Financial gifts to your beneficiaries during your lifetime will be treated as ‘lifetime gifts’ for inheritance tax purposes, which will have a potential liability 7-years from the date of the gift

 

Anything else I should know?

Maintaining the Property

The lender does retain a financial interest in the property and will insist that a robust type of buildings insurance policy is in place.

Secondly, they are likely to reserve the right to carry out inspections to make sure the property does not fall into dis-repair.  If they feel that repairs need to be made, they can insist they are carried out, or employ their own contractors to do the work and add the cost to the outstanding mortgage.

Income Tax

There is no income tax charge on money released from your home, however, if you subsequently invest or save any surplus, you might pay tax on any income generated.

State Benefits

Certain state benefits are means tested against the income an individual receives from investments and private pensions etc.  The monies provided from an equity release transaction could therefore reduce any benefits you might have been entitled to if you retain the monies in your own name

Disability Living Allowance and Attendance Allowance are not currently means tested.

Pension Credit (credit guarantee), Pensions Credit (savings credit) and Council Tax Benefit are all currently means tested.

Property market

The property market in the UK has created a general feeling that it is relatively simple to sell a house.  There are times when this might not be the case and to secure a sale, you might have to reduce your expected price or delay the timescales for selling altogether.

The interest accrues to the point at which the mortgage is repaid and it is important to understand that there is no guarantee of sale or indeed sale price in future.

 

Some reasons our clients have used a Lifetime Mortgage

  • We found our daughter’s new home in ours

Gifts to provide a deposit

Help to buy an ex-partner out of the house

  • I found financial breathing space in my home

Many retirees are now reaching retirement with remaining mortgages and credit card debts

A lifetime mortgage can give them back some of their income, by changing a ‘normal’ pay monthly mortgage to a ‘roll-up’ mortgage

Some use this type of mortgage to clear up those niggling debts that never seem to go away

  • Free up cash to help your grandchildren through university

As with helping get a deposit for a new home, helping pay for educational costs is a great way to give away an inheritance when it really makes a difference

  • Life’s little luxuries and Home improvements

  • State benefits not enough

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