A guide to equity release – by Daniel Mayman
We find that the majority of people in need of care would much rather remain in the comfort and familiarity of their own home to receive it. However, if you find that the level of your income or savings are insufficient to pay for this, are there other solutions available to help fund your care without the need to move out of house and home?
If you own your own property, even with an existing mortgage in place, then the simple answer is yes. You may already have heard of ‘equity release’ as a method of raising capital from your home to provide you with the income or capital you need to fund your care.
What is equity release?
‘Equity release’ is a general term and it covers two types of finance scheme; ‘lifetime mortgages’ and ‘home reversion plans’. Most will offer you the choice of either a lump sum, or an opportunity to take money regularly like an income (referred to as ‘drawdown’ or ‘flexible’), or a combination of both these options.
How does equity release work?
Equity release enables homeowners aged 55 or older in the UK to access their property’s value without selling it.
Two main options exist: lifetime mortgages, where you borrow against your home’s value and repay it upon death or moving into care, and home reversion plans, where you sell a portion of your property. Professional advice is essential due to the complex financial implications associated with these choices.
Can equity release help me reduce an inheritance tax bill?
Yes, in the UK, equity release can help reduce an inheritance tax bill by providing tax-free cash from the value of your home, lowering your estate’s overall worth. However, it’s crucial to seek professional advice, as implications on inheritance tax can vary based on individual circumstances and the type of equity release plan chosen.
Lifetime mortgages
Lifetime mortgages are financial products specifically designed for the over 55s, which raise a loan against your property (similar to a conventional mortgage). There are three main types available: –
1. Interest roll-up mortgages
Interest is added to your loan and you don’t make regular payments; the amount you originally borrowed, plus the ‘rolled-up’ interest is repaid when your home is sold (after you pass away or if you have to move permanently into a care home).
Remember that the amount you owe increases because interest is being added to the original loan. Lifetime mortgages are typically arranged this way, but some allow you to actually make monthly interest payments (see 2. below).
Eventually this might mean that you owe more than the value of your home. However, most good quality lifetime mortgage schemes offer a no-negative-equity guarantee which gives the reassurance that what you repay doesn’t exceed the value of your property. This means that your beneficiaries will never have to pay more than the value of the property when it is sold. Make sure your mortgage scheme includes this via approval from the Equity Release Council.
2. Interest-only mortgages
Like a roll-up mortgage above you get a cash lump-sum. However, like a conventional mortgage you make a fixed or variable interest payment on the loan each month.
If the interest rate is variable and your pension or other income is fixed, you may find it harder to meet your repayments if and when interest rates rise.
The capital amount you originally borrowed is repaid when your home is sold.
3. Fixed-repayment mortgages
You typically only get a cash lump-sum rather than income. You don’t pay capital or interest every month, instead a total repayment amount is agreed in advance that is higher than the amount of your cash lump-sum. This is paid back when your home is sold.
This can work in your favour if you end up living much longer than the lender thinks you will. But if your home has to be sold earlier than you planned, you will get a worse deal than if you had an interest roll-up mortgage.
4. Home reversion plans
Home reversion plans operate in a completely different fashion; you actually sell all or part of your home in return for a cash lump-sum, a regular income or both, and remain living in the property as a tenant. A reversion scheme is not a loan so there is no interest chargeable.
Usually, you don’t pay rent to the reversion scheme provider, or if you do it’s typically only a minimal amount.
When you pass away or move into a residential car home then the provider will sell the property and the reversion company gets its share of the proceeds. If you sold the entire property they will get all of the proceeds. For example if you sold half, they get that share of the proceeds, leaving the rest to go towards your estate.
The older you are when you start a home reversion scheme, the higher the percentage you’ll get of your home’s market value. Hence they are usually best suited to those aged over 70. It’s also important to get an independent valuation of your home.
A sale-and-rent-back scheme is not the same as a home reversion scheme!
These schemes have been aggressively marketed and you may have to leave your home after the end of the fixed term of your tenancy agreement, which could only last for five years. You will invariably have to pay a much higher rent than with a home reversion scheme. Consider these schemes only as a last resort and ensure you deal with a Financial Conduct Authority (FCA) regulated firm.
Key points of equity release schemes to remember
Here is a handful of key points to remember when considering equity release.
- You have to be a certain age (usually over 55) to qualify and own your own home, i.e. not be a tenant.
- You’re more likely to qualify if you don’t have a mortgage, or any mortgage you have is relatively small.
- You are still responsible for properly maintaining your home. If you don’t the scheme provider could arrange repairs, and you would still have to pay for them.
- You’ll still be responsible for paying all of your utility bills and council tax.
- Any equity release scheme will ultimately reduce the value of the inheritance you leave for your beneficiaries. The inheritance value of your property could be eroded altogether by the rolled up interest on a lifetime mortgage.
The options available for equity release are many and varied. There are many benefits to equity release, plus a few considerations You need to be made fully aware of all of the costs involved and the implications to you and your family if and when your circumstances change in the future.
All good quality lenders and providers of equity release schemes carry approval from the Equity Release Council (ERC). Equity release schemes are a complex area and it is essential you seek specialised independent equity release advice. Advisers in this area must carry a specific qualification and be suitably authorised by the Financial Conduct Authority (FCA).
Daniel Mayman
Independent Financial Consultant
Sterling & Law Group plc
