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Equity release – issues to considerCreated by Charlotte in Saving for you
Equity release is a topic which can stimulate particular interest among the older generation as it provides an individual with the means to benefit from the value of their own home (normally their biggest asset and possibly one which has seen considerable increase in value over the years) without having to move out of it. This article attempts to provide some basic information on the subject as well as providing points for initial consideration but it would be prudent for anyone considering an equity release plan to take professional financial advice before making any decision.
- Lifetime Mortgages
- Home Reversion Plans
I will now consider each product in turn:
These are special types of loans, purchase usually designed to run for the rest of your life. You borrow money secured against the value of your home to give you a lump sum now or a regular income. You do not make mortgage repayments to the lender. The loan and accrued interest is repaid to the lender when you die or you move into a residential care home. You continue to own your own home.
Lifetime mortgages schemes operate in the following way:
The lender agrees to give you a lump sum or a monthly income (or both), based on the value of your home. Nothing is repaid until you die or the property is sold, but interest is added to the amount you have borrowed each year. This is ‘rolled up’ over the life of the loan. How much you can borrow depends on how much your home is worth and on your age. Generally if you are older, you can borrow a greater percentage of your home’s value. You need to check whether the rate of interest can be fixed or capped and whether there are any redemption penalties associated with the mortgage. That will allow you to be sure of the maximum amount of interest added each year and the amount you owe at any time. Most lenders (and certainly those schemes covered by Safe Home Income Plans – SHIPs) offer a ‘no negative equity guarantee’. This means that the amount you owe can never be more than the value of your home. Even if the amount you borrow (plus the rolled up interest) is more than your property’s selling price, you will not have to repay any more than the amount your home is sold for.
Here is an example of a lifetime mortgage:
Your home is worth £100,000. You borrow £30,000 at a fixed rate of interest of 6.5%. There are no monthly payments. Instead, interest is added on and rolled up over the lifetime of the loan. Because you do not pay off any interest as you go along, the amount you owe mounts up more quickly so that after 15 years you owe the lender £77,155. This includes the £30,000 you originally borrowed. Any increase in the value of your home, after paying off the loan and interest, belongs to you or your family.
HOME REVERSION PLANS
These schemes involve the sale of all, or part, of your home to a reversion company in return for a cash sum or regular income and the right to live rent-free in your home for the rest of your life. After you die, the house is sold and the value of the proportion of your home that you have sold is paid to the reversion company.
Home reversion plans operate in the following way:
You agree to sell a percentage of your property (up to 100%) for an agreed amount. You can receive this as a lump sum, an income, or both. If you choose to sell all of your property to the reversion company, you will usually receive between 25% and 50% of its current market value, depending on your age (the older you are the higher the percentage). When you die, the percentage of your home that you sold belongs to the reversion company. If you sell your entire home, the company owns your home outright, including any increase in its value since you agreed to sell it. Some schemes offer a rebate for your family if you die within the first few years of signing up to a home reversion scheme.
Here is an example of a home reversion plan:
Your home is worth £100,000.You agree to sell all your property to the reversion company for half its current value, so you receive £50,000. When you die, the house is owned by the reversion company, so there is no residual value to pass on to your beneficiaries.
Important issues to consider
- Is equity release right for you? Would moving to a less expensive property be a better way of releasing money tied up in your home? Do you have other nest eggs, investments or savings, which you can use?
- Choosing equity release will affect you over the long term. You need to be happy with the arrangements and be confident that it suits your circumstances, now and in the future.
- These days, people are living longer. If you take out an equity release plan too early in life, you may not have enough value left in your home to move to another property later.
- Using the equity in your home will affect the amount you are able to leave as an inheritance, so it is strongly recommend that you discuss this with your family and/or the beneficiaries of your Will. It is also a good idea to make sure that your Will reflects your decision to take out an equity release product.
- Ask about the effect any lump sums or income you receive may have on any state benefits you receive.You should also remember that the rules on benefits could change in the future.
- With a lifetime mortgage, you can usually repay the amount you owe at any time but the lender may take an early-repayment penalty. But if you sell all or part of your home to a reversion company, you cannot change your mind.
- If the purpose for releasing money from your home is for home improvements, you may have the ability to fund it via a grant from your local council or the Home Improvement Trust, so you should consider these options first before entering into an equity release scheme.
- If you are looking to consolidate any debts you may have you should in the first instance take specialist advice or talk to your local Citizens Advice Bureau before entering into a lifetime or home reversion scheme.
- To understand the features and risks associated with these types of schemes you should always ask for a personalised illustration.
by Kevin Nelson of the St. James’s Place Partnership
This article attempts to summarise some of the options open to parents/grandparents and has been written by Kevin Nelson of St. James’s Place Wealth Management – he will be happy to answer any questions you may have and can be contacted at St. James’s Place Wealth Management , Chancellor Court, The Calls, Leeds LS2 7EH or on email at firstname.lastname@example.org or call on 07767 658 850. www.sjpp.co.uk/kevinnelson