Equity Release Made Clear

If you're retired and living on your pension, you may be finding money is a bit tight. If you own your own home and are in your mid-50s or over, you may be thinking about Equity Release because it could provide you with a lump sum or additional income. You might also consider equity release for tax-planning reasons.

In this article, you'll find out how equity release schemes work and what you might think about before starting one.

Before considering Equity Release

It's important to check whether there are other ways you could meet your financial needs before choosing an equity release scheme. Some ways might be to:

• claim any benefits you might be entitled to;
• check to see if your local authority can help you to pay for essential home improvements;
• trace any pensions you may have lost track of, using the Pension Tracing Service;
• use your savings or sell your investments, but consider getting advice before doing so; and/or
• sell up and buy somewhere smaller and cheaper (downsize).

• Lifetime Mortgages.
• Home Reversions.

• A roll-up mortgage (rolled up means interest is added to the loan – for example, each year). You get a lump sum or regular income and are charged a monthly or yearly interest which is added to the loan. The amount you originally borrowed, including the rolled-up interest, is repaid when your home is eventually sold.
• A fixed repayment lifetime mortgage. You get a lump sum, but don't have to pay any interest. Instead, when the home is sold, you have to pay the lender a higher amount than you borrowed. That amount is agreed in advance. The lender uses this higher sum to repay the mortgage when your home is sold.
• An interest-only mortgage. You get a lump sum, and pay a monthly interest on the loan, which can be fixed or variable. The amount you originally borrowed is repaid when your home is eventually sold.
• A home income plan. The money you borrow is used to buy a regular fixed income for life (an annuity). This income is used to pay the interest on the mortgage and the rest is yours. The amount you originally borrowed is repaid when your home is eventually sold.

Some lifetime mortgages include a shared appreciation element. This means the lender has a share in the value of your home.

When taking out a lifetime mortgage, you can choose to borrow a lump sum or to opt for a drawdown facility. This is suitable if you want to take occasional small amounts rather than one big loan, as it means you only pay interest on the money you actually need.

How does it work?

As with a conventional mortgage, you borrow money secured against your home. The home still belongs to you. Apart from roll-up schemes and fixed repayment lifetime mortgages, you will have to pay interest on the loan every month. When you die or move out, the home is sold and the money from the sale is used to pay off the loan. Anything left goes to your beneficiaries.

If there is not enough money left from the sale to pay off the loan, your beneficiaries would have to repay any extra above the value of your home from your estate. To guard against this, most lifetime mortgages offer a no-negative-equity guarantee. With this guarantee the lender promises that you (or your beneficiaries) will never have to pay back more than the value of your home - even if the debt has become larger than this.

Is it right for you?

It depends on your age and circumstances. For example:

• With a roll-up mortgage the interest you owe can grow quickly. Eventually this might mean that you owe more than the value of your home, unless you have a no-negative-equity guarantee.
• A fixed repayment mortgage becomes a better deal if you live much longer than the lender thinks you will. But if the home is sold much earlier than you planned, you will get a worse deal.
• An interest-only mortgage with variable interest rates may not be suitable, because the interest rate may rise faster than your income.
• A home income plan only results in a small income after paying interest. It is only suitable if you are older, perhaps around 80.

• an arrangement fee for setting up the scheme;
• legal fees and valuation fees; and
• buildings insurance.

• If you use the lump sum to buy an income, will it make you liable for more tax?
• How would the scheme affect your State or local authority benefits?
• What happens if you end up owing more than the home is worth? (Many providers now provide a no-negative equity guarantee
• What happens if you die soon after taking out the scheme?
• What conditions does the scheme put on you when you carry on living in the home?
• Would you qualify for a grant to help you pay for home repairs or alterations?
• What fees are payable if you decide to repay the loan, say after three years?
• How would the scheme affect any inheritance tax payable on what you leave?

• an arrangement fee for setting up the scheme;
• legal fees and valuation fees; and
• to maintain the property.

• How will taking out a home reversion affect my income tax position, eligibility for State or local authority benefits and inheritance (including inheritance tax) when I die?
• If I want a regular income how will this income be achieved? Will the income be guaranteed? Will it be fixed or variable? How often and for how long will it be paid?
• What conditions does the home reversion put on me when I continue to live in the home? .

back to the top