Equity release: a reformed character?
For most people, a significant proportion of their wealth is in the value of their family home. With people living longer and living costs increasing, some over 55s may find that their retirement planning has not been sufficient and can feel financially trapped in their own homes.
Homeowners who do not wish to downsize may look at equity release. Despite some bad press in the early 2000s, equity release lending has doubled in the last 10 years with homeowners unlocking a record £971 million in the second quarter of 2018.
Francesca Sassoli answers some common questions relating to equity release.
What is it?
There are two types of equity release:
1 Lifetime mortgages
- These are much more popular than home reversion plans.
- You take out a mortgage over your home at a fixed or capped interest rate.
- You can take out an initial lump sum, with the option to take more cash in the future.
- The interest is rolled up and added to the amount due when the mortgage is repaid (usually on death or sale).
- The title deeds remain in your name and a charge is added in favour of the lender.
2 Home reversion plans
- A lender buys some or all of your house for less than the market value.
- You live there rent free until you move out, die or sell the house.
- The lender receives a percentage of the sale proceeds equal to the share of the property they own.
- You no longer own your own home and the title deeds are updated to reflect this.
Why might I do it?
Homeowners release equity for many reasons; they may wish to carry out work to their property, help their children get on the property ladder, plug a shortfall in income, or pay for a holiday.
Whatever the reason, the decision should not be entered into lightly. Even though most providers now offer a “no negative equity guarantee” (meaning you will never have to pay back more than the value of the property), signing up for high interest rates and early repayment charges can significantly eat into the value available for your beneficiaries on your death. It is a good idea to make sure your beneficiaries know of your plans, to avoid any surprises after your death.
What are the alternatives?
It is important to consider whether there are any alternatives before committing to equity release. Are there any other financial options available to you?
Deending on their age, some homeowners may be able to take out a regular mortgage, if they have sufficient income. Others may choose to downsize, or sell or rent out part of the property, in order to avoid the expense of equity release.
What other points should I consider?
If you move house in the future, it may be possible to transfer the equity release scheme to your new property. However, you should bear in mind that some properties may not provide suitable security, and this could limit your options on a move. The loan will need to be repaid if you move into long term care or sheltered accommodation, which could trigger early repayment charges.
In addition, entering into equity release could limit your independence in relation to the property. As with most types of mortgage, you will need to keep the property in good repair and let your equity release provider know if you are leaving the property empty for more than six months. Under an equity release mortgage, you will also need to inform the equity release provider if anyone else moves in or if you carry out any home improvements and alterations.
This is a good time to check that your Will is up to date, particularly if you are gifting the proceeds of the equity release to one of the beneficiaries. If you have not put lasting powers of attorney in place, then consider doing so now, to make sure there are people who are able to deal with your affairs if you lose mental capacity.
How do I know if it is right for me?
Equity release schemes should be approached with extreme caution. If used carefully and in the right circumstances, equity release schemes can be useful. However, the schemes have wide reaching consequences and specialist advice should be taken before signing on the dotted line.
At Cripps Pemberton Greenish, we offer a comprehensive advice package to ensure our clients understand the terms of the arrangement and the full implications in their circumstances. We deal with the transaction in two stages:
- A member of our private client team will meet with you to discuss other options available to you to raise cash, your intended use of the funds and how the arrangement may impact your estate and your Will.
- A member of our property team will explain the terms of the arrangement to you and handle the transactional aspects if you decide to proceed.
For an initial consultation to talk through your options regarding equity release, please contact me at email@example.com or on 01892 506 354.