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Equity Release Plans

 

Cashing in

Equity release is a way for older people to cash in on the value of their home. It is frequently in the news because politicians are looking at whether it is the answer to the problem of funding long-term care in later life.

When deciding on whether to release some of the value in your home, remember that the money you receive can affect your tax position and eligibility for any means-tested benefits, such as Pensions Credit.

There are two types of equity release: lifetime mortgages and home reversion plans.

Lifetime mortgages

Lifetime mortgages are the most popular. You raise a mortgage on your home but don't have to make any payments during the lifetime of the loan. You have to be at least 55 years old to qualify, but usually people wait until they're at least 10-20 years older before taking one out.

The interest is normally fixed at the outset. As a rough rule of thumb the amount you owe will double every ten years, depending on the interest rate. The loan is repaid from the sale of your home, either when you die or move into long-term care.

If you want to pay it off early, you will have a hefty early repayment charge, but you can normally move home as long as you use a lender belonging to the trade body, Safe Home Income Plans (Ship). Members of Ship all promise that you'll never have to pay back more than your home is worth under its negative equity guarantee.

The longer you live, the more the loan will grow, meaning your loved ones are likely to get a smaller share of any inheritance left to them. You also cannot raise as much cash this way compared with a home reversion plan.

Home reversion plans

With a home reversion plan you are selling part of your home – or even all of it – to the plan provider while still living in it.

Your home will be valued by a surveyor working for the provider but you won't receive the full market value as the lender is offering you a tax-free lump sum and is allowing you to live in your home rent free for the rest of your life.

How much you can 'sell' your home for to the provider depends on your age, health and gender. For instance, a 60-year-old may only get 10% of the value in return for selling 50% of their home, compared to 20% for a 75-year old.

The home reversion plan must be paid off when you sell your house, so it's no good for anyone wishing to leave their property to their next of kin or friend.

Equity Release Comparison Table

Factor

Lifetime Mortgage

Home Reversion

How interest is calculated?

As a percentage of the advance - as with any other loan.

No interest charged. Lenders take equity stake in property.

Protection against rising interest rates?

The majority of plans are at a fixed rate of interest for life.

No risk, as no interest charged.

Protection against falling value of property?

Can be protected by no negative equity guarantee. Also some providers offer enhanced protection of a percentage of the property value.

If less than 100% is used, the provider shares with you any fluctuations in value.

How your house will be valued?

The lender will appoint a surveyor to value your property.

The provider will appoint a surveyor to value your property. The actual value is then reduced taking account of your age and the fact that you will be living in the property rent free for the rest of your lives.

Can you move house?

Providing you use a SHIP member provider you are guaranteed the right to move home and take the loan with you. (The property will need to be acceptable to the lender.)

Providing you use a SHIP member provider you are guaranteed the right to move home and take the loan with you. (The property will need to be acceptable to the lender.)

Can you repay your loan?

Yes, but there may be early repayment charges for doing so.

Home reversion plans are not designed to be repaid early.

Suitable to leave property as inheritance?

Yes. You retain ownership of the property. The loan must be repaid from either the sale proceeds or other funds.

The provider owns all or part of the property and therefore this plan is not designed for those wishing to leave the actual property.

Suitable for cash inheritance?

Yes, cash released can be used for any purpose.

Yes, cash released can be used for any purpose.

Useful to reduce inheritance tax liability?

Yes, if cash is gifted at least seven years before death. This can save having to gift a whole property.

Yes, cash value of house is available, although there may be no equity in the property to inherit.

  1. Check you have the right to live in your home for the rest of your life
  2. Check you can move if you want without paying a penalty
  3. Check there is a no negative equity guarantee

Equity release is a big step and shouldn't be taken lightly. Discuss it with your family first

 

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