Equity Release Schemes
Your home may be repossessed if you do not keep up repayments on your mortgage.
Equity release will reduce the value of your estate and can affect your eligibility for means tested benefits.
What is a lifetime mortgage?
Lifetime mortgages are a popular means for homeowners typically over the age of 55 - they can help by releasing some equity in their homes. Thousands of people in the UK already choose this method to help achieve their retirement goals and supplement their retirement income.
A lifetime mortgage is a way of borrowing a set amount of money against the value of your home, in the form of a long-term loan, and without the need to move. You continue to own your own home, for the duration of the plan and as long as you are living in it - you'll also be responsible for keeping your home in good repair.The loan is paid back using the proceeds from the eventual sale of your property. This is usually when you die or have moved into permanent long-term care.
The money released can be used for whatever you wish (so long as any outstanding mortgage has been paid off). You should be aware that taking out a lifetime mortgage could reduce your eligibility to means-tested benefits and could affect your tax position.
Also, where the interest is added to the loan, there may be no value left in your home at the end of the plan. Taking out a lifetime mortgage may also reduce the options that you have for moving or selling your home. You should talk to your Financial Adviser and/or solicitor about this if you're at all unsure.
Home Reversion Plans
When you take out a home reversion plan you will not receive the full 'market value' of the property, but a percentage of it according to your age. The older you are the more you will get. When the property is sold on your death, the investment company receives a share of the proceeds, in proportion to the amount of the property you sold to them.
If you sold them the whole property they will get all of the proceeds, or if you sold them a 75 per cent share of your home they will receive 75 per cent of money resulting from the sale.
Remember that if you sell all of your home, and it becomes more valuable in the future, the increase in value will benefit only the investment company. If you retain a share, your estate will benefit from part of any increase in the value of your home.
It's also worth considering schemes which offer a "no negative equity guarantee". This ensures that, should the property not meet the full value of the equity release scheme, then the equity release company receives only the full market value of the house. Any excess over and above the value of the property will be written off under schemes which provide a no negative equity guarantee.
Before you think about equity release, you should also consider your other options:
- Savings and assets that could help fund your retirement
- Consideration of a conventional Mortgage as an alternative
- Sell up and trade down
- Sell up and live with children or other relatives
- Sell up and hope that the local authority can provide housing
- Selling and renting
- Take in tenants (not an ideal option for many elderly people)
- Local authority or other grants
Equity Release Schemes may affect your eligibility to means tested benefits. Equity release products involve borrowing against or selling all or part of your home. There may be more suitable methods of raising the funds you need.
Equity release schemes may work out more expensive in the long term than downsizing to a smaller property.