What Is Equity Release? How Can It Help Me?
Equity release is like a mortgage in reverse. You borrow money against the value of your property – but you still get to live there until you die or move to a care home.
These plans are protected by the Equity Release Council and are regulated by the Financial Conduct Authority.
As solicitors we can give only legal advice about the plans – we are not authorised to give investment advice. We do not sell equity release plans but can recommend independent financial advisers with specialist expertise in these plans.
Who Is Equity Release For?
You must be aged 55 or over to benefit from equity release. It’s aimed at the growing number of people who find themselves ‘house rich but cash poor’.
Perhaps you need to free up some extra income…but much of your wealth is tied up in your property. You need cash but don’t want to sell your home. Equity release helps you to enjoy both during your lifetime.
These plans help you to gain access to your wealth without the expense and inconvenience of having to sell your house and downsize.
Sometimes people get divorced either after or approaching retirement. They need to raise funds to pay off their former partner.
Other people may wish to use equity release to enable them to help their children or other family members to purchase a home. Some use it as a means of inheritance tax planning.
Whatever your reasons, once you have finalised the loan, the net proceeds are yours to spend as you wish.
Is Equity Release Right For Me?
Equity release is a very good way of helping Britain’s growing elderly population to cope with life’s financial challenges without having to leave the property they love.
But it’s not for everyone so it’s important to make sure that it’s right for you.
Remember that it’s a long-term loan – just like a mortgage – and that you will have to repay that loan. Unlike a mortgage, you don’t have to make monthly repayments. Instead, the money is paid back after you have died or moved into long-term care. This lump sum repayment is funded from the value of your property.
The amount of money you can borrow is based on the value of your property. The equity release lenders will also be taking a view on how long you are likely to live and how much your property will be worth when you die or move to a care home.
Never forget that equity release is a loan which must be repaid. The more you borrow and the longer you leave it before paying any interest, the more you will have to repay in the long run. That may mean you’ll have significantly less to leave your children and grandchildren as an inheritance.
How Does Equity Release Work?
There are two types of scheme:
- Lifetime mortgage – you borrow against the value of your main residence but continue to own the property.
- Home reversion – you sell part or all of your home to a provider in return for a lump sum and/or regular income. You can live in your home rent-free.
You can move house as long as the lender approves of the new property. After all, they are investing in it.
Pros And Cons Of Lifetime Mortgages
Lifetime mortgages are more popular than home reversion plans. Lenders loan up to 60 per cent of the value of the property.
You can withdraw money in small amounts or lump sums. Check with the provider to see if there is a minimum amount you can withdraw. Don’t borrow more than you need. Remember that eventually you will have to pay back every penny of capital and interest.
Generally, you don’t have to make any loan repayments while you’re still alive – but the downside of this is that the interest compounds. So your debts can soon mount up.
Some lifetime mortgages allow you to repay some or all of the interest as you go. A few let you pay off the capital as well. This is a great option if you suddenly receive an unexpected windfall.
Lifetime mortgages can be more costly than normal mortgages for two reasons:
- The interest rates are higher
- Interest compounds if you don’t pay it off at regular intervals.
Pros And Cons Of Home Reversion Plans
Home reversion plans are rare now, representing only a small percentage of the equity release sector.
They allow you to sell off part of your home – usually 20 to 60 per cent of the market value – but you can still live there until you die or move into long-term care.
Some providers stipulate that you must be aged 60 or 65 before you can borrow.
You must keep your home fully maintained and not ignore anything that could affect its value. Your lender will inspect the property from time to time to ensure you’re keeping to your end of the agreement.
Think very hard before you opt for a home reversion plan. They’re not for everyone. You need to live for at least five or six years after taking one out or you could end up losing money on the deal.
How Is The Money Paid Out To Me?
You can either take the money as a lump sum or draw it down as you need it.
Often it’s better to draw down the money – usually quarterly – otherwise you could face some large interest bills right from the start. And they will only get bigger as they compound up.
Many people opt for a combination of the two. They will take out a small lump sum early on to pay off their debts or refurbish their house…and then draw down quarterly to supplement their income.
Remember that if you use an equity release loan to pay off small debts (such as credit card bills), you are turning unsecured debt into a loan that is secured against your home. You will be paying a lower interest rate but the debt is now secured against your property!
What Happens If I Spend It All At Once?
Your estate will still be liable for the money you have borrowed but only when you die (or go into care). But you could suffer the consequences long before then.
Never forget that you borrowed money against the value of your home – and on a legally enforceable promise to the lender that you would keep that property in good repair.
If you fail to carry out the necessary maintenance on your property, the lender can take possession of your home to prevent their investment from falling further into disrepair. You could lose your home.
In the worst case scenario, you could end up with no home, no money and large debts.
Will Equity Release Affect My Benefits And Care Home Funding?
Yes. If you borrow money in excess of the thresholds for benefits and/or care home funding then your payments would stop.
How Much Does It Cost?
Aside from the interest you will be paying, there are also other charges:
- an application or administration fee charged by the equity release plan provider
- a fee payable to the financial adviser who arranges the plan
- a fee for the surveyor who will check your property for the plan provider (usually paid by the equity release provider but not always)
- your legal fees – at Coles Miller we charge from £750+VAT to carry out the legal work on your equity release mortgage (it can cost more if the property is leasehold because the process is more complicated).
How Long Does It Take?
It usually takes just under 10 weeks. That is three or four weeks to secure a loan offer from a lender plus a further six weeks to complete the legal work.
This timescale can sometimes be considerably shorter. We have dealt with equity release mortgages that have been completed within a couple of weeks of being issued.
Equity Release Interest Rates
Interest rates for equity release are higher than those for normal mortgages. This is because – for most plans – you will not be making any monthly repayments.
So the plan provider must wait many years before they see any return on the money they lend you. Also, the legal protections they must set up to safeguard their investment in you are more complex. This costs them more – so they pass on these charges to you the borrower.
Which Are The Best Equity Release Companies?
It is important to reiterate that, although Coles Miller has solicitors who specialise in equity release, we can advise on only the legal aspects of these policies. As lawyers we are not authorised to give investment advice or to recommend specific providers.
We are happy to discuss equity release with you from a legal standpoint to help you decide whether it is right for you.
If you are happy, we can recommend specialist independent financial advisers who can advise you on the best equity release providers.
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