First, understand the basic facts about equity release.
Equity release is becoming more of a mainstream product for retirement planning purposes. They are used to provide a capital lump sum or extra income to supplement pension income. Equity release schemes are now more flexible, which is helping to cater for the increasing needs of our retired generation. However, like any financial transaction, equity release schemes are not appropriate for everyone and therefore advice MUST always be sought in order to make the correct decision for your own personal circumstances.
What is Equity Release?
Designed principally for people over the age of 55, equity release loans help those looking to release some of the equity tied up with the bricks and mortar of their home.
These schemes allow you to remain living in your home until the last homeowner has died or moved into long-term care. At that point the house is usually sold by your beneficiaries, with the proceeds used to pay off the equity release lender. Any remaining balance is passed into your estate & distributed in accordance with your wishes, usually by your Will, if one has been made.
Types of Equity Release Schemes
The two main types of equity release plans are the lifetime mortgage and home reversion.
> Lifetime Mortgage – is the most popular form of equity release these days accounting for over 98% of all plans written. In essence, they are a form of mortgage whereby you can release equity from your main residence and then selecting whether you wish to make any repayments, or not. Lifetime mortgage schemes allow you to retain 100% ownership of the property. They do exist in different formats such as roll-up lifetime mortgage, interest only lifetime mortgage & drawdown lifetime mortgage.
> Home Reversion – in contrast, home reversion plans have declined in popularity due to enhancements in flexibility of lifetime mortgages. A home reversion plan will require you to sell, part or all of your home in exchange for a lump sum, income, or both. Therefore, you effectively become a co-owner in your own home, with no rent to pay and as a condition you acquire a lifetime tenancy on the property.
What are the Common Pitfalls with Equity Release Plans?
As stated earlier, equity release mortgages may not be suitable for everyone & they can have a significant effect on one’s inheritance. Therefore, the initial equity release advice taken, and the subsequent size of the release, will have the greatest bearing on the eventual outcome.
To help understand the pros and cons about equity release and home reversion plans, Equity Release 2go >> has complied the following list of advantages and disadvantages associated with this form of retirement mortgage: –
Equity Release Pros
>> Tax Free Proceeds – Funds received from your home equity plan are tax-free upon receipt, being classed as a withdrawal of capital. NB tax maybe payable if funds are placed into a bank account thereafter, depending on tax status and type of account e.g. ISA.
>> Permanence of Residence – With protection afforded by the Equity Release Council (formerly SHIP), ALL equity release schemes allow you reside in the property for the rest of your life, rent free. Therefore, even if one party dies, it will continue in the survivors name.
>> No Negative Equity Guarantee – Automatically included in all SHIP member schemes. It provides protection to the ultimate beneficiaries by assuring them that no matter what, they will never end up owing any amount, over & above the value of the property.
>> Protection & Regulation – Equity release schemes have become a highly regulated product with both lifetime mortgages & home reversion schemes coming under the protection of the Financial Conduct Authority (FCA) together with the Prudential Regulation Authority (PRA). Both these regulatory bodies provide the rules & governance over how equity release is advised to UK consumers. Additionally, there is also the Equity Release Council of which both advisers & equity release companies can now become members. The Equity Release Council acts as the voice for the industry as a whole in helping promote the safe guidance to its customers.
>> No Monthly Payments Necessary – Both home reversion & roll-up lifetime mortgages require no payments to the lender. This allows you to release equity without any effect on your household budget. There are now interest only options where monthly payments can be made.
Equity Release Cons
>> Reduces Your Inheritance – By releasing equity from your property leaves a financial charge which must be repaid once the property is vacated. This bill is usually settled from the sale proceeds upon death or moving into long-term care.
>> Affects Means Tested Benefits – The lump sum from an equity release mortgage can affect means tested benefits such as pension & savings credit, plus council tax benefits. The effect this lump sum has on your level of your savings will determine any reduction.
>> Early Repayment Charges – Should an equity release loan be repaid before the end of its natural term then a penalty could be incurred. Equity release schemes are designed to run for the rest of your life, hence the lender will recoup its costs accordingly.
>> Impact of Set Up Costs – Like any mortgage, there are costs involved with setting up an equity release plan. The valuation fee may require an upfront cheque, with the application fee, solicitors fee & advice fee all being deducted from the release on completion.
>> Future Remortgaging – By releasing equity from your home now, you are reducing the net equity remaining in the future. This may limit your capital raising options in the future and deny further tranches of money for your retirement.
This is an equity release plan. To understand the features and risks ask for a personalised illustration.