Equity Release and Home Income Plans
Unlocking money from your home.
Many retired people who manage on a small pension and limited savings are also living in properties which have soared in value in recent years, especially here in Norfolk and Suffolk. Equity Release and Home Income plans can enable you to release some of the value locked up in your home. However, many are irrevocable arrangements, so careful planning is perhaps more important here than anywhere else.
Whilst there are a range of different Equity Release and Home Income (or Home Reversion) schemes offering lump sums and/or regular income, they all work on the same principle: they lend you a part of your home’s value in return for a share of the proceeds when you die.
In most cases you will need to be at least 60 years old, have no outstanding mortgage (or you will need to use the equity release money to pay down the existing loan), and own a property in reasonable condition. Certain exclusions apply, such as mobile homes, properties above commercial premises, smallholdings and properties with a relatively short lease left to run.
Equity Release and Home Income plans can be complicated products and are a major step for many people. Your house is almost certainly the most expensive asset you own; it is also your home.
Good advice is therefore key to success. Be very careful about taking "advice" from someone who only sells these types of plan. They may have a vested interest! Better to use an Independent Financial Adviser (IFA) such as ourselves, as we can offer so much more than just Equity Release plans and treat your finances holistically. See Our Services for the range of services we can offer
Age Concern and the Financial Conduct Authority both recommend getting independent financial advice before proceeding with any Equity Release or Home Income plan. As Independent Financial Advisers we will look at your overall finances to see if equity release is really the best option for you, help find the right type of scheme – bearing in mind that in some cases you could risk losing state benefits and may have to pay extra tax. They can give a lump sum, a regular income or both.
Any scheme which we recommend will conform with the principles and standards laid down by the Equity Release Council (formerly known as SHIP), the organisation for safe home income and equity release plans.
Equity release will not suit everyone. It is always worth considering whether funds could be raised affordably from other sources before going down this route. According to AVIVA, 1 in 10 homeowners aged 55-70 were looking to release equity as a means of boosting their retirement income. It can be expected that many more people will look to release equity from their properties while interest rates remain low, mortgages are paid off and house prices remain stable.
Here are the main equity release schemes with their pros and cons:
Home reversion schemes
You sell your home or a share of it to a reversion company for a lump sum or in return for a monthly income (or a combination of both). Technically you become a tenant, albeit with the right to continue living in your home rent-free (or sometimes for a nominal rent) for the rest of your life. When the property is sold – usually when you die – the reversion company gets its payout. If, for example, you sold 50% of your property to the reversion company, it gets 50% of the proceeds – including any growth. If you sold 25% of your property, it gets 25% of the proceeds, and so on. In addition, the reversion company will also only pay you a percentage of the current market value for the share of your property it buys. This is because you get to carry on living in the property until you die, and the company may have to wait years for its return. If you sell all of your property to the reversion company, for example, you will typically get between 30% and 50% of its current value. It will rarely be more than 60%. The actual figure will depend on your age (and your partner’s). Older people will get more, and men get more than women – because of differences in how long they are expected to live.
Home income plans
These used to be the most popular type of equity release plans. You take out a mortgage against your home and use the money to buy an annuity which guarantees you an income for life. Mortgage payments are deducted from this monthly income, although the original capital is only repaid from the sale proceeds, normally after you die.
With these equity release plans the lender gives you a lump sum or monthly income (or both). You pay nothing – the interest is ‘rolled up’ into the loan. The amount borrowed plus this interest is repaid out of the proceeds from the sale of the property after you die. How much you can borrow depends on the value of your home and your age – the older you are, the higher the percentage of your property’s value you can borrow. Generally, you will not be advanced more than 50% of the value of the property.
Whilst equity release plans can be a good way of cutting Inheritance Tax bills, they will also reduce what your family will inherit. While it should ultimately be your choice whether to sign up to a scheme, it is probably a good idea to discuss it with close family members and/or anyone who might have expected to inherit your home. This may help avoid any unpleasantness or misunderstandings. If the property has been a family home for a long time, bear in mind that your children or other relatives may also have an emotional attachment to it. They may even have been thinking of living in the property after you die.
Children or other relatives may be prepared to help you out financially instead of you taking out an equity release plan. They could then inherit the whole property. We can advise on any tax issues involved.
You may have other assets or investments which could boost your income or give you the lump sum you need. We are able to take a holistic view of your finances. Consider, too, whether moving to a less expensive property might be a better way of releasing money tied up in your home – rather than letting an equity release company profit from your bricks-and mortar investment.
If you receive means-tested state benefits, these could be reduced or lost altogether – which in turn could mean having to pay more for things like dental treatment and glasses. We will check the rules before you take out an equity release plan and advise you accordingly..
How to avoid any undue risk
Look for plans carrying the SHIP logo (for Safe Home Income Plans). SHIP (0870 241 6060) is an industry body set up to promote safe equity release schemes. Companies who are members provide a number of guarantees, including: you will have the right to live in your property for life; the freedom to move to an alternative property without penalties; and that you will never owe more than the value of your home.
If the scheme’s income comes from an annuity, you’ll get a better rate the older you are.
If you are just retired, it may be worth waiting a few years before signing up to an equity release scheme in order to get a better deal. Equally if you are very old or in poor health you should think carefully about schemes paying monthly incomes – you may not live long enough to get a decent return.
The equity release market is becoming more competitive. But interest rates on mortgage-based schemes, for example, are still noticeably higher than those on ordinary mortgages. Most equity release plans also involve paying valuation and legal fees, although these may be refunded assuming you go ahead. You remain responsible for repairing and insuring your home, and will still have to pay the Council Tax. Reversion companies in particular will expect you to maintain your home to a reasonable standard to protect their investment.
Can you move or sell up?
You may want to sell your house at a later date and move somewhere smaller or more suitable for your needs, or you may want to sell up completely to move into rented sheltered housing or into a care home. You should check whether any equity release plan you are considering allows you to transfer it to a new property or whether there is a penalty if you end the scheme before death.
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