Equity Release
Many elderly people are known to be “asset rich but cash poor” as key financial assets are mainly tied up in the illiquid value of your home. Because your home is worth great deal of money you are effectively sitting on a pile of cash which you can’t get at, whilst at the same time you could do with more income in order to live comfortably. Equity Release is a type of financial arrangement that can help in this situation, by effectively releasing some of the capital in your home without your having to sell up. Equity Release may also be effective in planning against the effect of Inheritance Tax (IHT) liability.
Equity release plans have a minimum qualifying age which for most is 60 or 65. Couples can apply jointly. There is also a maximum ‘loan to value’, or LTV - the highest permitted percentage of the value of your home that you are allowed to realise through the plan. The maximum LTV might start at, say, 20 per cent for a 55-year-old homeowner and rise to 50 per cent for a 90-year-old. There is also usually a plan fee in the region of £500, plus legal costs. You should allow some time to set up a plan as the process can take several months.
Equity release plans are complicated, and may be daunting for many clients. In the past there have been problems with older style home income plans, when, due to rising interest rates, some homeowners were left with negative equity. Most reputable plan providers nowadays give a “no negative equity” guarantee, but you should still take extreme care in ensuring that you understand what you are buying. It is also wise to discuss your plans with your family.
Equity Release mortgages are niche products aimed at fulfilling the needs of a highly-defined market segment. They are designed primarily for older people. The features of Equity Release mortgage products differ fundamentally from conventional mortgages for house purchase and improvement and there are therefore several other factors to take into account in order to determine if such a product is right for you as these arrangements may expose you to risks that are not encountered with traditional mortgage arrangements.
Equity Release products are not suitable to every elderly person. Check that this product will meet your needs if you want your family or others to inherit your home. If you are in doubt, seek Independent legal and financial advice.
The following are the main types of plan to consider:
Roll-up mortgage schemes (sometimes called lifetime mortgages):
With this type, you can take out a loan secured against the value of you home*. The amount you can borrow depends on your age and the value of your property: the older you are, the more you can borrow. The amount is calculated as a percentage of your property’s value. The interest rate is usually fixed, and is around 6.5%-7.5% currently although rates may be higher or lower than this. You repay nothing until the house is sold on your death(s) or when you go into long-term care. At that point loan and compound interest become due. With roll-up schemes you continue to own your property and as a result you benefit from any house price appreciation during the term of the loan. However, as you make no repayments, the interest on the loan can accrue quickly, although Safe Home Income Plans (SHIPs) members’ schemes offer a no-negative-equity guarantee.
The amount of money that will be left when the house is eventually sold will be its market value at that time less the loan and interest due.
* Think carefully before securing debts against your home.
Home reversions:
These are the oldest forms of Equity Release dating back to the 1960s.
With these schemes, you sell your home, or a proportion of it, outright, in exchange for a cash lump sum. The lump sum is usually equal to a proportion of the value sold, depending on your age. For example, at age 70, with a home worth £200,000, you might sell 65 per cent of you home and only receive 25 per cent of its value. When you die or go into long-term care the reversion company will take 65 per cent of the house proceeds. You still own the other 35 per cent: the reversion guarantees that the residual part of the property’s value will be untouched.
With either type of plan you can generate cash immediately which may be used to purchase an income for life (also known as an annuity) or for any other purpose. This might be very attractive if you have a shortfall in your pension income against your outgoings.
Appreciation mortgage schemes:
These combine features of roll-ups and reversions, with lower interest being paid in exchange for a share of the equity.
Home income plans:
You take out a mortgage, use it to purchase an annuity, and the annuity pays off the loan and leave you with some income. These are now rarely sold today and there is now only a handful of this type of Equity Release products on the market.
Legal disclaimer
These pages provide generic information about various aspects of financial services advice that we provide as well as possible areas of clients’ financial planning needs. We hope they are helpful to you but they do not, on their own, add up to proper investment advice and we cannot take responsibility for anything you do in reliance on them without further discussion with us. Please do not make a decision based upon the information contained within these pages alone. They are not detailed or comprehensive enough to enable you to make an informed decision which is tailored to your circumstances and needs. Please contact us now for tailored advice.