What is Equity Release?

 Equity release is a means of turning part of the value of the home into accessible cash so that it can be used for whatever purpose it was intended.

Equity release, unlike traditional mortgages offers the option of making no repayment until you or your spouse dies or moves into Long Term Care.

With an Equity Release scheme you

• Have to be over a certain age and own your own home
• Can get a lump sum, regular income and both continue to live in your home

What are the reasons for doing equity release?

Norwich Union/Mintel research2005 state the main reasons for doing equity release are, in order

The Alternatives to Equity Release

There are various ways of increasing pensioner’s income levels

• Claiming benefits available
• Grants
• Cutting living costs
• Dip into savings
• Downsizing

• Asking family

What types of schemes are THERE?

There are two forms of Equity Release, these are

Lifetime Mortgages

 You take a loan secured on your home and continue to own it. There are currently two types of Lifetime Mortgage.

Interest Only Mortgage

Rolled Up Interest

For interest only mortgages you pay the interest on a monthly basis. The mortgage is redeemed when the house is sold (downsizing or entering a care home) or if you die.

Interest rates can be fixed or variable. Some plans, called Home Income Plans provide an income from the money released by purchasing an annuity.

A rolled up interest loan is where you pay no interest on the mortgage taken out. Again when the property is sold the mortgage is repaid. The amount you can borrow can grow quickly especially if you take out a lump sum at the start.

Some lifetime mortgages can include a shared appreciation element. This means you agree with the lender that they can have a share in any increase in the value of the home when it is sold.

Home Reversion Schemes

With a reversion scheme you sell part, or all, of the property to a reversion company, bank or insurance company. The price is usually between 20% and 50% of the current value depending on age. You will normally be paid less than the value of your home, typically between 35% and 60% because they cannot resell the property until death or entry into a care home. The house will revert back to the lender if you go into a care home.

The reversion company provides an income and / or a lump sum and a guarantee that you stay in the property completely rent free for as long as you live or until the property is sold.

The minimum age for reversion schemes is usually higher than for lifetime mortgages.

One of the main differences between reversion schemes and lifetime mortgages is that with reversion schemes any increase in the value of the house will go in full or part to the reversion company. With lifetime mortgages a rise in house prices is retained by you the owner.

Questions and Answers 

Tax Implications and effects on State Benefits  

There is no point raising money from your home if it merely results in a corresponding reduction in state benefit support. There is a range of benefits where entitlement is not affected by the income and / or capital generated by equity release, because they are not based on a means test but depends on satisfying conditions relating to National Insurance contributions, disability or other non-means tested criteria. There is however a full range of means–tested benefits which may be affected by equity release.

As this area is a very complicated area we will provide, free of charge a report, individual to your needs, on benefit entitlements, tax allowances, local authority grants and the effect of equity release schemes on means tested benefits. The report is prepared by a company called Fintal and is backed by the Council of Mortgage Lenders.

The report will meet all the requirements of the current FSA legalisation. It ensures client benefit income is maximised, and enables us to present clients with options for consideration.

Safe Home Income Plans (SHIP) guarantee

SHIP is a company supported by the leading providers of home income and equity release plans. It was launched in 1991 and is dedicated entirely to the protection of plan holders and provision of safe home income and equity release plans.

All participating companies are pledged to the SHIP code of practice.

1. The members of SHIP agree to provide fair, simple and complete presentation of their plans. The benefits, obligations, variables and limitations must clearly be set out in their literature, including all costs which the applicant has to bear in setting up the plan, the position on moving, the tax situation and the effect of changes in house values.

2. The client’s legal work will always be performed by the solicitor of his or her choice. In all cases, prior to the completion of the plan the solicitor will be required to sign a certificate to the effect that the scheme has been explained to the client.

3. The SHIP certificate will clearly state the main cost to the householder’s assets and estate e.g. how the loan amount will change, or whether part or all of the property is being sold.

4. All SHIP plans carry a ‘no negative equity’ guarantee i.e. you will never owe more than the value of your home.

Use of Equity Release in IHT planning

With the rise in house prices an IHT liability is often created because individuals want to continue to remain in the house they own.

They have considered all the other options previously mentioned in this section (i.e. trading down, life assurance policy in trust).

The key consideration is what the borrower does with the money released (e.g. gifting, investment, use of a specific IHT scheme) and whether at the end of the day the reduction in IHT is matched by the increase in the net assets in the beneficiaries’ hands.

Although compounding interest under equity release will increase debt on the estate and therefore reduce IHT, unless investment funds grow correspondingly the beneficiaries would be worse off.

It is imperative that family members are kept fully involved and informed when any type of IHT planning is undertaken.

There are a number of IHT schemes which have been referred to in the IHT section of this site.

USEFUL LINKS 

SHIP website

Age Concern Information

FSA Fact sheet Raising Money from your home

Money made clear guide – Equity Release schemes made clear