If you've owned your home for a number of years, it's likely that you have built up significant equity in it. To release a portion of this wealth downsizing is one option, but equity release enables you to release a tax-free lump sum, without having to move. For older homeowners who need some extra cash to supplement their pensions, equity release has a lot to offer.
Accessing the value of your property
Equity release plans allow you to access some of the value tied up in your property, either as a lump-sum payment or a regular income stream.
However, equity release is not always easy to understand and many people have a number of questions about how the plans actually work.
Lee Young, a Partner and Head of our Wills & Tax Team, specialises in equity release and offers a professional, efficient and friendly service which works pragmatically in conjunction with your financial adviser.
Lee has set out five of the most common concerns that individuals have about equity release below, aiming to separate some of the realities from the myths.
What if there is nothing left to inherit?
Signing up for equity release will always have an impact on the value of the estate you can leave to the beneficiaries of your will.
Equity release plans typically involve you borrowing money against the value of your home. The amount borrowed, and the interest is then repaid only when you die or move out of the property, for example into a care home. Subject to your age and other lender's constraints, the full value of your house can be used to calculate how much equity can be released.
The longer the period between you signing up to an equity release plan and it being repaid, the more interest will be added.
One of the min types of equity release plan is a home reversion plan.
1. Home reversion plan
A home reversion plan involves you using just a part of your home's market value, say 40%, to raise money. There is no interest to pay during the plan, but when it ends, the lender is entitled to 40% of your home’s then current value. The value of your home is likely to have increased by that point of course and this means that your family will be able to inherit 60% of what your property is worth, minus any sales costs or inheritance tax that would be due.
The downside of this is that you will not be able to raise as much money as if you used all of your home for equity release.
What if I end up owing more than my house is worth?
One of the biggest worries for people thinking about equity release is that their interest bill will increase to such an extent that the eventual debt will be greater than the value of the house and they, or their families, end up having to settle the debt. This would involve beneficiaries not only selling the home, but also having to find extra cash (either from your estate, or out of their own pockets) to cover the cost.
If you arrange equity release with the mainstream providers this will not be an issue. It is wise to choose a company which is a member of the trade body, the Equity Release Council. Most of the major equity release companies offer their customers what is known as a “no negative equity guarantee”.
Some plans also have an income payment facility, like a conventional mortgage, which means the interest roll up can be limited or avoided altogether.
2. No negative equity guarantee
For however long interest is allowed to roll up for, the amount you will owe will never exceed the value of the property that the plan is linked to.
In these circumstances, it would be possible for the cost of the equity release plan to swallow up the whole of the property’s value, but this is the maximum that such a deal would cost.
Won't the equity release company own the whole house?
Many people view the equity release process as a form of selling their home, albeit while retaining the right to continue living in it.
In fact, equity release is just a form of borrowing against your property, like a normal mortgage.
3. Lifetime mortgage
The most popular type of equity release plan is called a lifetime mortgage. Here, instead of the capital borrowed, plus interest, being paid off monthly, these costs roll up and are repayable when you die or move out of the property.
Unlike with a home reversion plan, the equity release company would not own any part of your home. Like any other mortgage agreement, there are still rules that you have to follow as regards maintenance and alterations to the property, all designed to protect the equity release company’s financial interest in your property.
Even at the end of an equity release plan, the provider has no right to the actual property, it only having the right to be paid whatever sum it is owed at that point.
If the beneficiaries of your estate have sufficient funds, for example from other assets in the estate, they should not be forced to sell the home if they do not wish to.
What happens if I need to go into a care home?
Having to move into a residential care home is one of the reasons an equity release plan will be brought to an end, with the money that has been borrowed then having to be repaid to the lender.
4. What if one of you remains in the home?
If both property owners need to move into care, the home will then have to be sold at this point to pay off the equity release loan.
What if I need more money than I borrow first time?
While most equity release clients want to take a lump sum payment, perhaps to pay off an existing mortgage, cover the cost of home improvements or to pass on some money to their beneficiaries, some clients prefer to use the money to supplement their pension income. It may be therefore that you might need more money in the future.
Most plans have drawndown facilities, which is the ability to take a further loan on the value of the property. Drawdown allows additional sums to be taken on a one off or more frequent basis. It doesn't mean that you receive a guaranteed income for life. The value of your property, among other factors, will limit the total amount you can take, but often taking a second loan is perfectly feasible, particularly if the value of the property has risen since the first loan was taken out.
One advantage of this approach is that you are only charged interest on the money you have borrowed. If you borrow less to begin with the interest will accrue on this lower amount than it would on a larger lump sum payment.
Lee concludes “In every scenario, it is essential to take independent financial advice if you are thinking of signing up for equity release. It is vital that you fully understand the pros, cons and potential implications of everything that you are taking on. Please get in touch if you would like any advice from me on this topic.”
Our Equity Release Team and are happy to discuss any issues that this raises for you and we offer a free initial meeting or chat on the phone.
If you have any questions, you only have to ask us at Frettens. Please call 01202 499255 or 01425 610100 and Lee or a member of the team will be happy to chat about your situation and your particular requirements.