Equity Release Explained
Equity Release Explained
Equity Release is a term given to all ways of releasing equity (the money value) from your home in the form of an income and/or a cash lump sum. Some types of equity release scheme take the form of a mortgage on your home; others involve selling part or all of your home to the equity Release company. Whichever method you choose, all reputable schemes protect your right to live in your home for the rest of your life.
Lifetime Mortgage Equity Release
Generally, you take out a loan against the value of your home. This is paid to you as a lump sum or in the form of income. The loan is secured over your home and attracts interest over the years, like a mortgage. The difference is no payments are made to the lender until death or if you go into a nursing or residential home and the debt gradually rolls up. This is known as a Lifetime Mortgage. When you move or die, your home is sold and the debt is repaid from the sale proceeds. You or your estate retains any balance left over. With this option, you remain the owner of your home at all times.
There are also some mortgage interest schemes where you can pay the interest charged on the loan each month so that the debt does not increase, just in the same way as a normal interest only mortgage but these schemes are rare and your ability to afford the repayments will be checked.
Home Reversion Equity Release
The sale of some or all of the home to an equity release company in exchange for a cash lump sum. Even though someone else owns part or all of the home, you cannot be made to leave and for most schemes you do not pay rent or interest for the portion you no longer own. You are still responsible for maintenance and insuring the whole property. Upon death or moving out, your property is sold with your estate receiving money for the portion you still own or if you sold 100% of your property to an equity release company, they will keep all of the proceeds.
Am I eligible for Equity Release?
You need to be at least 55 years of age to release a lump sum from your home. If you would prefer to release an income only you generally need to be at least 65. Single people, widows(ers) and couples can all use equity release with rates based upon the younger age. You must own your home and it should be freehold or long leasehold. It also needs to be in good condition. If you currently have a mortgage or equity release on the property, this must be repaid as part of any new equity release scheme.
How much will I get?
You will not get the full market value for your home. This is because equity release companies may have to wait many years to get their money back. E.g., if you sell and receive lump sum at age 70, you may live for 30 years or more and this is how long the company would have to wait. In addition, you are generally allowed to live rent free for the rest of your life. How much you get depends on the current value of your property, whether you are male or female and your age. As a guide, I suggest you work on a maximum of 50% of the value of your home, although many people release money in stages such for example £30,000 today with a facility to release another £30,000 anytime in the next 10 or 15 years.
What are the fees?
Think of this in the same way as any other mortgage: Advice fees, survey fees and solicitor costs are all involved. However, some equity release companies may offer you a partial or full refund of these costs. Whatever the situation is, you will be told about all costs involved before you go ahead.
What about my family?
If you have a family, I think it is important to involve them as much as possible. They will understand what is happening and know that your best interests are being looked after. Any decisions you make are likely to affect your estate on your death. If your family are the ones that will administer your estate, they should be aware of your actions. Obviously, it is your decision whether or not to involve your family.
Is my property suitable?
Houses, bungalows and flats are suitable, provided that they are in good repair. Properties should be freehold or long leasehold and must be owned by you. Property values at £90,000+ are acceptable although some companies may accept lower values.
What if I receive state benefits?
If you receive State benefits, taking an equity release plan may affect some benefits but not all. However, your financial position after equity release may outweigh the value of reduced or lost benefits. Talk to your financial adviser about your benefits situation.
What if I need to go into a nursing home?
If you ever need to receive care at home your plan would be unaffected. If you ever need to go into a nursing or residential home there are many ways you may be affected. E.g., if you had sold 100% of your home for a cash sum and had to go permanently into a home, the Equity Release company could release extra money to you. With the mortgage equity release options, if you sell your home to go into a nursing or residential home, you will need to repay the loan and interest.
What happens when I die?
If you took out a mortgage plan, your home will be sold in order to repay any loan and interest outstanding. The balance of the proceeds would go to your estate. If you sold part of your home for a lump sum, the property would again need to be sold. The proceeds would be split between the equity release company and your estate in the agreed proportions. If you sold 100% of your home to the equity release company, they remain as the owners but can now either sell or rent the property as they wish.
Other Things You Should Consider
equity release is not suitable for everyone. It generally works for people who are asset rich and cash poor. Personal feelings also enter into the equation such as not wanting to leave your home and move to a smaller or unfamiliar place. If you are unsure whether or not equity release is right for you, please ask us for advice. All meetings are in your own home with no obligation and we welcome family members also being present. Both male and female advisers are available should you have a preference and we are not offended by people expressing a preference.
What is SHIP?
SHIP stands for Safe Home Income Plans. This association was set up in 1991 and represents the leading providers of equity release plans. Participating companies have pledged to observe the SHIP Code of Practice and guarantee to provide you with a fair, simple and complete presentation of the plan, including costs, the tax situation, the effects on your plan if you move house or if the value changes and the effect of the transaction on the value of your estate on death. The SHIP guarantee gives you the protection of an unbiased solicitor as well as a no-negative equity guarantee.
FREE EQUITY RELEASE SUITABILITY ASSESSMENT
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