Equity Release - Unlocking money from your
The issues surrounding
diminishing pensions affects us all, but it is already a very real and
of people who have already retired. The average expenditure in 2013 for people between the ages of 65 & 74 was £403.80 per week, so the Basic State Pension of £159.55* per week (*but this could be as low as £122.30 depending on your National Insurance contribution record!), doesn't stretch very far!
people who manage on a small pension and limited savings are also living
in recent years. The average house price in England and Wales is now £178,007 (Land Registry figures for March 2015), and unlocking this wealth
is now a major consideration to enable people to enjoy the retirement they
Equity release plans – also called home reversion or home income plans or,
increasingly, lifetime mortgages – are a way of enhancing our lifestyles in
retirement. Whether you wish to buy that new car, to pay for a holiday or home
improvements, or simply to
make daily life
more comfortable. These schemes essentially allow you to borrow money against
the value of your home, with the debt being repaid from the sale proceeds after
your death or once you have gone into long term care.
How they work
While there are a range of different schemes offering
lump sums and/or regular income, they all work on the same principle. The providers
of these schemes lend you a part of your home’s value in return for either
repayment together with interest or a share of the proceeds when you die. In
you will need to be at least
mortgage (or you will need to use the equity release money to redeem your
existing loan), and own a property that is in a reasonable condition.
release plans can be
complicated products and are a major step for many people. Your house is almost
certainly the most expensive asset you own and also your home!. Good
advice is therefore key.
Age Concern and the Financial Conduct Authority ( the UK’s financial
regulator), both recommend getting independent financial advice before
plans – their advantages:
They can provide a lump sum, a regular income
or both. The lump sum available can be considerable (up to 50% of the value
of your home) the additional income can run into hundred
- Money released from the
value of your property (equity) is tax free, although if the cash is then
to produce an income, there may well be tax to pay on an ongoing basis.
don’t have to move house or sell your home to unlock this wealth.
With reputable equity release schemes there is a rock-solid guarantee
be able to continue
to live in and enjoy your home until the day you die – and in many cases
still be able to leave a proportion of the property’s value
to your beneficiaries. Of course, if you don’t have children or
family to leave your property to, then equity release might seem an even
- Equity release schemes can
also be a way of cutting inheritance tax bills. Inheritance tax is
40% (40p in every pound) on everything
over £325,000 (£425,000 if you qualify for the Main Residence Nil Rate Band) in 2017/2018. Importantly, that figure includes the value
of your home. The value of many properties means that IHT is no longer
only the rich
have to pay. Equity release plans are a perfectly legal way of avoiding
the tax. They could be used, for example, to give a child or grandchild
buy their own property while keeping money out of the hands of the
can also be used to pay for care bills without having to sell up at
what can be a traumatic enough time enabling you to carry on living
in your own home.
Types of Equity Release schemes and their advantages
and potential disadvantages:
The lender gives you a lump sum or monthly income (or both). You pay nothing – the
interest is ‘rolled up’ into the loan. The amount borrowed plus this interest
is repaid out of the proceeds from the sale of the property after you die. How
much you can borrow depends on the value of your home and your age – the older
you are, the higher the percentage of your property’s value you can borrow. Generally,
you can be advanced up to 50% of the value of the property.
- No interest payable while you are alive, so you will get a higher
income for the same sized loan than with an interest-only mortgage
or home income plan.
- Most loans are fixed-interest, so reducing risk.
- Plans are available to people as young as 55.
- The provider of a lifetime mortgage most likely will usually be
a member of the Safe Home Income Plans association (SHIP).
- The uncertainty about how much will have to be repaid at the end – and
how much will be left for your family.
- Interest payments can mount up quickly and will further reduce what
your family will inherit. Your family could end up with nothing from
the sale proceeds even though the lump sum you were lent only seemed
a fairly small proportion of the home’s value.
- Interest rates may be high.
- You may not be able to borrow extra funds at a later date.
You borrow a lump sum secured against the value of your home. You pay interest
each month, but you have a lump sum to spend as you wish. The capital is eventually
repaid out of the sale proceeds.
- The amount you owe is fixed (as you are paying interest repayments
each month) so any increase in the value of your home belongs to you
or your family.
- You can borrow at a fixed rate so you know exactly what you have
to pay every month.
- You need to be able to afford the ongoing interest payments: you
should think about investing the lump sum you borrow.
- Many schemes involve buying an annuity. Because annuity rates are
so low and they increase with age, these schemes are often only suitable
for elderly homeowners.
- Variable rate loans can be very risky: your payments could rise more
than your pension or other income.
Home Income Plans
These used to be the most popular type of equity release
plans. You take out a mortgage against your home and use the money to
buy an annuity which guarantees you an income for life. Mortgage interest
payments are deducted from this monthly income, although the original
is only repaid from the sale proceeds, normally after you die
- Regular income for life, and the mortgage interest is deducted automatically.
- The amount you owe is fixed and any increase in the value of your
home belongs to you or your family.
- Not suitable for those looking for a substantial lump sum.
- Income is normally fixed at outset, so will be eroded by inflation.
- Built-in annuities are not the most competitive – you are generally
better off shopping around for an annuity (if the plan permits this)
or investing the money elsewhere.
Home Reversion Schemes
You sell your home or a share of it to a
home reversion company for a lump sum
or in return
a monthly income (or a combination of both). Technically you become
a tenant, albeit with the right to continue living in your home rent-free
for a nominal rent) for the rest of your life.
When the property is sold – usually when you die – the reversion company
gets its payout. If, for example, you sold 50% of your property to
the reversion company, it gets 50% of the proceeds – including any
growth. If you sold 25% of your property, it gets 25% of the proceeds,
and so on. However the
reversion company will
only pay you a proportion of the current market value for
the share of your property it buys. This is because you get to carry
living in the
until you die, and the company may have to wait years for its return.
If you sell all of your property to the reversion company, for example,
get between 30% and 50% of its current value. It will rarely be more
than 60%. The actual figure will depend on your age (and that of your
Older people will get more, and men get more than women – because of
differences in how long they are expected to live.
- No ongoing repayments to make, the reversion company makes all
of its money when the property is sold.
- You know at outset what share
of your home (but not its value) you will be leaving to your beneficiaries.
continue to share in any rise in the value of your property (unless
you have sold
can take extra cash advances, depending on the amount you originally
you are a smoker or have a serious illness, you may be able to get
a bigger payment (due to your shorter life expectancy).
- The reversion company will buy at a significant discount
to the current market value. The big discount at which the reversion
company will want to
buy makes these
schemes less suitable for people in their 60s.
- If you die soon
after taking out a plan, you could effectively have sold off your
a share of
it) on the cheap. Some schemes give families a rebate if you die
within the first
few years of signing up.
- Reversion companies can be choosy about
the properties they take.
Taking Independent Advice
As Independent Financial Advisers (IFAs) Provident Solutions look at
your overall finances to see if equity release is really the best option
for you, and if it is we will help you find the right type of scheme.
In reviewing your individual financial circumstances we will ascertain
whether you could risk losing state benefits (such as Pension Credit
or other means tested benefits), whether you could potentially pay extra
income tax or lose the opportunity to claim any Local Authority Grants
that may be available for essential home improvements. Equity release
will not suit everyone. It is always worth considering whether funds
could be raised affordably from other sources before going down this
route. If Equity release is a suitable option it can offer some of the
many advantages listed below.
Your beneficiaries / family
equity release plans can be a good way of cutting inheritance tax bills,
they will also
beneficiaries / family
will inherit. While it should ultimately be your choice
whether to sign up to a scheme, it is probably a good idea to discuss
close family members
and/or anyone who might have expected to inherit your
home. This may help avoid
any misunderstandings later. If the property
has been a family home
for a long time, bear in mind that your children or
other relatives may also have an emotional attachment to it. They may
even have been
thinking of living
in the property after you die. Children or other relatives
may be prepared to help you out financially instead of you taking out
could then inherit the whole property. At Provident
Solutions we will be able to advise on any tax issues involved.
We will also be able to take a holistic view
of your finances.
You may have
could boost your income or give you the lump sum. You
could also consider if moving to a smaller property ('downsizing')
might be a better way of releasing money tied up in your
home – rather than letting an equity release company
profit from your bricks-and-mortar investment.
How to avoid any
for plans carrying the SHIP logo (for Safe Home Income
is an industry
set up to promote safe equity release schemes. Companies
who are members provide a number of guarantees, the
most important being a 'no negative equity guarantee' this means
that neither you nor your estate will be liable for more than the value
of your property. Even if the
amount you borrow (plus the rolled-up interest) is more than your property’s
selling price, you will not have to repay more than the amount your home is sold
for. This provides excellent 'piece of mind'.
Other guarantees include giving you the right
to live in your
for life and the freedom to move to an alternative
property without penalties.
If the scheme’s income comes from an annuity, you’ll
get a better rate the older you are. If you are just
retired, it may be worth
a few years
signing up to an equity release scheme in order to
get a better deal. Equally if you are very old or in
poor health you should think carefully
paying monthly incomes – you may not live long enough
to get a decent return.
The equity release market is becoming
But interest rates
on mortgage-based schemes, for example, are still slightly
higher than those on
ordinary mortgages. Most equity release plans also
involve paying valuation and legal fees (always use
your own solicitor), although
be refunded assuming
you go ahead. You remain responsible for repairing
and insuring your home, and will still have to pay
the Council Tax. Reversion companies
expect you to maintain your home to a reasonable standard
to protect their investment.
How can Provident Solutions help?
Provident Solutions offer a fully comprehensive 2 stage Independent Advice
service. At our first meeting we will fully explore your financial circumstances
to evaluate whether an Equity Release scheme is appropriate for your
individual circumstances. If an Equity Release scheme is appropriate
we will then search the market to find the most suitable product to suit
circumstances and then present our recommendations at a second meeting
and if accepted we can then complete all of the administration associated
with effecting such a scheme.
If you are interested in finding out more call us
on 0116 2592371 to arrange