If you’re considering equity release on your property it’s very important that you know all the ins and outs of the plan you’ve got in mind. With an equity release plan you can turn some of the value of your home into tax-free cash, which you can spend any way you wish.
What do you need to know?
To qualify for an equity release plan you must own your home outright. Equity release plans are regulated by the government through the Financial Conduct Authority. Advisers and product providers are duty-bound to adhere to published standards.
The Equity Release Council has a Code of Conduct to help ensure financial safety, so it’s worthwhile taking a look at the plans approved by the ERT.
There are two types of equity release plans:
1) The Lifetime Mortgage allows you to take out a loan secured on your property. You receive the money as a tax-free lump sum and there are no monthly repayments involved. Interest is accrued and added to the loan, and then paid back to the lender once you pass on and your property is sold.
There are benefits to being able to raise cash under a Lifetime Mortgage, and you can keep a percentage of ownership in your property to leave as an inheritance. In addition, if you release only a part of the equity you’re able to release more at some future point, putting you in the position of being able to capitalise on any increase in the value of your property as there is no debt or new financial obligation.
You’re eligible for the Lifetime Mortgage from the age of 55 years old.
- The second type is the Home Reversion Plan, which allows you to sell all or a share of your house for either a tax-free lump sum or an additional regular income, or you can opt for a combination of both. There are no monthly payments, and after you pass on your house is sold to pay the lender.
If you sold 100 per cent of your home to the reversion company, it takes 100 per cent, including any growth; if you sold 50 per cent to the reversion company, it takes 50 per cent of the proceeds, including growth. The reversion company will also pay you a percentage of the current market value for the share of your home it buys. Selling your entire home to the reversion company will fetch between 30 and 60 per cent of its current value, depending on your age.
To be eligible for the Home Reversion Plan you must be between 65 and 80 years old.
There are variations of these two types of equity release programmes, for example, you might find a plan with a ‘draw down’ facility preferable, as it allows you to have access to the cash and interest is calculated only once you draw the money, thereby reducing the amount of money owed when the plan comes to an end.
Note: Taking out any type of equity release plan will reduce the value of your estate and in some cases may impact your entitlement to state benefits.
Home Reversion Plans make up around 25 per cent of the market and are expected to increase in popularity because the government has stipulated that they be regulated by the FSA. Also bear in mind that you’ll not benefit on the percentage of the house sold if your property increases in value. The discount which you get from the Home Reversion plan depends on your age and life expectancy.
Whether an equity release plan is your best way forward will depend largely on your current situation and your needs. Be sure to research the available plans and options and contact a financial advisor for expert advice.
Disclaimer: The information and data provided are for general information purposes. They do not constitute investment advice nor can they take account of your own particular circumstances. If you require any advice on investments, you should contact a financial or other professional adviser.