If you are 55 years of age or over, you can consider unlocking some of the capital locked up in your house. Taking out any type of equity release means it will affect the inheritance left to loved ones, along with potential tax implications and impacts on eligibility for certain welfare benefits. Additionally, equity release can help pay off an existing mortgage, allowing homeowners to unlock capital for various purposes, including financial planning and home improvements. This means you can enjoy the benefits of equity release whilst continuing to live in your own house.
Understanding Equity Release
Equity release is a financial solution that allows homeowners to unlock the value of their property and receive tax-free cash without having to move. This can be particularly beneficial for those looking to supplement their retirement income or fund significant expenses. By releasing equity, homeowners can access a lump sum or regular income, providing them with greater financial flexibility and peace of mind. However, it’s essential to understand both the benefits and potential drawbacks of equity release before making a decision. While it offers immediate financial relief, it can also reduce the value of your estate and affect your entitlement to means-tested benefits.
How Equity Release Works
Equity release works by taking out a loan secured against the value of your home. This loan is typically repaid through the sale of the property when the last surviving person named on the mortgage dies or moves into long-term care. There are two main types of equity release products: lifetime mortgages and home reversion plans. Lifetime mortgages are the most popular form of equity release, allowing homeowners to borrow a lump sum or receive regular income while still retaining ownership of their home. On the other hand, home reversion plans involve selling a portion or all of your property to an equity release provider in exchange for a lump sum or regular payments. Understanding these options can help you choose the right equity release product for your needs.
Why should you consider equity release?
People have different reasons for taking out an equity release loan. Older people might enter into an equity release scheme in order to unlock the capital in their house to carry out alterations or repairs or to upgrade their property. Others might decide to spend the money they’ve raised on a once in a lifetime holiday.
Both the age of the homeowner and the property value are key factors determining eligibility for equity release and the amount of equity that can be released through these financial options.
Some older people want to share their wealth now rather than having their family wait until they die. Perhaps they might want to help a child or grandchild get onto the property ladder or to help them with improvements to their house.
Equity release is an option that you might consider when carrying out succession planning, especially as the Inheritance Tax threshold has been frozen until 2030 and house values continue to rise.
Eligibility and Suitability
To be eligible for equity release, homeowners typically need to be at least 55 years old and own a property worth at least £70,000. The property must be the homeowner’s main residence and in good condition. However, equity release is not suitable for everyone. It’s crucial to consider your individual circumstances and long-term financial goals before making a decision. Seeking independent legal advice is essential to ensure you fully understand the implications of releasing equity from your home. Additionally, exploring alternative options, such as downsizing or other financial products, can help you make a more informed choice.
What can you spend the tax free cash on?
One of the key benefits of equity release is that there are no restrictions whatsoever on what you can spend the money on. It is entirely up to you what you do with it. Having no restrictions means it is yours to do with what you like.
What are my options when taking out an equity release loan?
Most authorised providers will offer either a home reversion plan or lifetime mortgage. Each of these works differently and there are pros and cons with each.
Home reversion plans
With a home reversion plan you sell all or part of your house to the equity release provider. The amount you receive in a home reversion plan is significantly influenced by the property value.
You continue to live in the house until you die or move into long-term care. If you only sell part of your house to the equity release provider, it means you will continue to benefit from the increase in the value of your home.
Another benefit from using a home reversion plan is you move the value of your house or that part of your house you transfer to the equity release provider out of your estate. You receive a sum of money in exchange which you can spend on whatever you want. It is only what it left when you die that is included in your estate.
The downside with a home reversion plan is that the amount you receive is likely to be somewhere between 20% and 60% of the value of your property. Age can also be a factor in working out what the equity release provider is prepared to pay. This is because the provider must allow you to continue to live in your home until you die or move into long-term care.
Also, if you receive any means-tested benefits, a cash lump sum might impact on your benefits.
Lifetime Mortgages
A lifetime mortgage is a loan over your property. This type of mortgage allows you to borrow against the value of your property without having to make any repayments. This means you continue to live in your property and the mortgage is paid off when your home is eventually sold after you die or go into long-term care.
Interest rates are crucial in determining the cost of borrowing against your home. Interest accrues on a compound basis. That means interest will be added to the outstanding loan each year and in subsequent years, you will pay interest not only on the original loan but the loan plus all the interest added to that point. Depending on the interest rate, this means the value of the loan can build up quite quickly.
In some instances, you can pay the monthly interest payments, just in the same way as you would pay an interest only mortgage. This simply keeps the level of the load at the original advance made. Whether you pay interest or not, there are usually early repayment charges if you repay a lifetime mortgage early.
Equity Release Council
The Equity Release Council (ERC) is a not-for-profit organization dedicated to promoting high standards and best practices among equity release providers. The ERC provides guidance and support to homeowners, ensuring that equity release providers adhere to strict rules and regulations. By choosing an ERC-approved equity release provider, homeowners can be confident that they are working with a reputable and trustworthy company. The ERC’s website offers a list of approved providers, making it easier for homeowners to find a reliable equity release provider who meets their needs.
Safety and Regulation
Equity release is regulated by the Financial Conduct Authority (FCA), which ensures that equity release providers follow strict rules and regulations to protect homeowners. The FCA provides guidance and support to homeowners and helps resolve disputes between homeowners and equity release providers. In addition, equity release providers must adhere to the standards and guidelines set by the Equity Release Council, offering further protection for homeowners. One of the key safety features of equity release is the negative equity guarantee, which ensures that homeowners will never owe more than the value of their property. This guarantee provides peace of mind, knowing that the debt will not exceed the property’s value, even if property prices fall.
How can you explore which equity release option is best for you?
You will need to speak to an independent financial adviser who holds an equity release qualification. We can refer you to a suitable adviser to help you understand the benefits of equity release as well as the associated risks.
Once you have decided to go ahead, we can deal with legal work on your behalf to ensure a smooth process leading to the release of funds to you.
Experienced equity release solicitors, Wishaw, Lanarkshire
Here at Pomphreys, we provide a comprehensive range of property related legal services. Robert Allan has extensive experience in all aspects of residential and commercial conveyancing, including equity release. Robert will explain the benefits of equity release as well as the associated risks. If you are thinking about exploring equity release, please get in touch with us.
This article is by Robert Allan
Robert Allan, Partner
Robert Allan graduated from the University of Strathclyde in 1980. Robert deals with all Residential and Commercial Conveyancing, specialising in leases for shops and office premises.
Tel: 01698 373365
Email: rha@pomphreyslaw.com
