As living costs rise, and the shortfall in adequate pension provision hits home for many now reaching their retirement, schemes that allow you to release the equity in your home are forecast to increase in popularity as many look towards the value in their homes to cover that shortfall.
A growing number of pensioners as well as their children now consider Equity Release as a logical consideration for those wondering how to maintain or improve their quality of life in retirement. Indeed for a lot of children over the age of 40, their parents enjoyment of life and quality of life in retirement is far more important than receiving an inheritance.
For those considering equity release, the following is intended as an initial guide.
Equity release is the term used to encompass all financial products that are used to release home equity, without the need to meet an ongoing monthly payment for those aged 55 or over. The products fall into two main categories which are Lifetime mortgage / Equity Release Schemes and Home Reversion Plans.
Lifetime mortgage products are the most common equity release product available. Lifetime Mortgage providers provide a maximum lump sum dependent on your age and the value of your property. The agreed maximum equity release can be issued either as, a single lump sum, a lump sum plus ongoing monthly amount, or as a minimum lump sum at outset followed by a drawdown facility.
Drawdown schemes are lifetime mortgage schemes where you only take the minimum lump sum required by the lender, with the balance of the agreed drawdown facility being available for release in the future as and when required. Some conditions and limitation apply to drawdown equity release, but in general they provide a much more cost effective approach to releasing equity in the home.
All lifetime mortgages have interest added to the amount borrowed, and generally at a fixed rate of interest for life. This amount then builds over time until the outstanding balance is repaid, which is either upon sale of the house, a move into long term care, or when the last surviving applicant passes on.
The maximum lump sum available differs between the different equity release providers, but as a rough guide, for someone aged 75 with a property value of £220,000 a lump sum of around £94,000 would be possible. This money is then available to spend as you wish, with the most common reason for equity release being to help ones children now when it is of more benefit, rather than waiting.
Releasing equity in your home is not the definitive solution however. It can be helpful in certain circumstances but is not right for everyone. It is recommended that anyone considering an equity release mortgage seek specialist and independent Equity Release Advice to ensure that all the positive and negative aspects have been explained in full.
Some of the positives are:
- No monthly payment
- Fixed rate of interest for life
- Flexibility to draw equity as and when required can reduce the speed at which interest rolls up against the capital released.
- No negative equity guarantee
- Portable – you can transfer the mortgage to a new property subject to lending criteria, and sufficient equity existing in the new property.
- The loan and interest are repaid usually from the sale of the home, when the customers die or leave their property because they need long-term care.
- You retain full ownership of the property and can live in the property for life.
- Can reduce the amount of inheritance tax liability.
- Can provide assistance now for the improvement to the quality of life.
- Lifetime mortgages as from October 2004 have been regulated by the Financial Services Authority.
Some of the negative are:
- Releasing equity can effect your entitlement to means tested benefits such as Council Tax Benefit and Pension Credit.
- As time goes by and interest rolls up against the loan, it can restrict your ability to move house.
- Releasing funds will reduce the value of your estate and the amount that can be left for your heirs
- There is usually a minimum lump sum that has to be taken, even if not required at outset.
- Any existing mortgage needs to be repaid from the funds available.
- Any release of a lump sum above £10,000 could reduce an entitlement to means tested benefits, unless immediate capital expenditure is foreseen, or a period of Income Assessment is still in force.
Releasing Equity in your home is an important decision and one where the benefits of receiving independent specialist advice is without question. The brief overview provided here just scratches the surface of all the possible scenarios that should be considered before reaching a decision on whether it is right for you.
Fortunately consultations with specialist equity release advisers are readily available in the marketplace without cost these days, and so anyone considering equity release should take full advantage of the information available so that a well informed decision can be reached.