Equity Release

 

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Equity Release

How equity release plans work?

While there are a range of different 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.

Equity release 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 essential.

Age Concern and the Financial Services Authority, the UK’s chief financial watchdog, both recommend getting independent financial advice before proceeding.

An Independent Financial Adviser (IFA) 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.

Equity release plans – their attractive features

They can give a lump sum, a regular income or both. The lump sum could be tens of thousands of pounds; the income boost might be worth as much as a hundred pounds a month or even more.

Money released from the value of your principle residence is FREE of tax, although if the cash is then invested there may be tax to pay on any income or growth.

You don’t have to move house or sell your home to unlock equity. With reputable equity release schemes there is a rock-solid guarantee that you will be able to continue to live in and enjoy your home until the day you die – and in many cases still be able to leave something of the property’s value to your family.

Of course, if you don’t have children or family to leave your property to, then equity release might seem an even more attractive concept.

They can also be a way of cutting inheritance tax bills. Inheritance tax kicks in at 40% on everything left behind over £325,000 (2009/2010). Importantly, that figure includes the value of your home.

The value of many properties means that IHT is no longer something only the rich have to pay. Equity release plans are a perfectly legal way of mitigating inheritance tax. They could be used, for example, to give a child or grandchild the deposit to buy their own property.

They can also be used to pay for care bills without having to sell up at what can be a traumatic enough time.

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.

Types of equity release schemes.

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.

Pros

No ongoing repayments, the reversion company makes all of its money when the property is sold.

You know at outset what share of your home (if not its value) you will be leaving to your family.

You continue to share in any rise in the value of your property (unless you have sold its entire value).

You can take extra cash advances, depending on the amount you originally took.

If you are a smoker or have a serious illness, you may be able to get a bigger payment.

Cons

The reversion company will buy at a discount to the current market value. The big discount at which the reversion company will want to buy makes these schemes less suitable for people in their 60s.

If you die soon after taking out a plan, you could effectively have sold off your house (or a share of it) on the cheap. Some schemes give families a rebate if you die within the first few years of signing up.

Reversion companies can be choosy about which properties they take.

Interest-only mortgages

You borrow a lump sum secured against the value of your home. You pay interest each month, but you have a lump sum to spend as you wish. The capital is eventually repaid out of the sale proceeds.

Pros

The amount you owe is fixed so any increase in the value of your home belongs to you or your family.

You can borrow at a fixed rate so you know exactly what you have to pay every month.

Cons

You need to be able to afford the ongoing interest payments: you should think about investing the lump sum you borrow.

Many schemes involve buying an annuity. Because annuity rates are so low and they increase with age, these schemes are often only suitable for elderly homeowners.

Variable rate loans can be very risky: your payments could rise more than your pension or other income.

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