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Equity Release - Unlocking money from your home

An overview
The issues surrounding diminishing pensions affects us all, but it is already a very real and daily challenge for millions 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!

Many people who manage on a small pension and limited savings are also living in properties which have soared in value 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 always envisaged.

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 most cases you will need to be at least 60 years old, have no outstanding 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.

Equity 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 proceeding.

Equity Release 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 of pounds a month.
  • Money released from the value of your property (equity) is tax free, although if the cash is then invested to produce an income, there may well be tax to pay on an ongoing basis.
  • You 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 that you will 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 more attractive concept.
  • Equity release schemes can also be a way of cutting inheritance tax bills. Inheritance tax is 40% (40p in every pound) on everything left behind 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 something 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 the deposit to buy their own property while keeping money out of the hands of the taxman.
  • They 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:

Lifetime Mortgages
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.

Advantages

  • 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).

Potential Disadvantages

  • 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.

Interest-Only mortgages
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.

Advantages

  • 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.

Potential Disadvantages

  • 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 capital is only repaid from the sale proceeds, normally after you die

Advantages

  • 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.

Potential Disadvantages

  • 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 for 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 (or sometimes 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 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 on living in the property 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, you will typically 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 partner’s). Older people will get more, and men get more than women – because of differences in how long they are expected to live.

Advantages

  • 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.
  • You continue to share in any rise in the value of your property (unless you have sold its entire value).
  • You can take extra cash advances, depending on the amount you originally took
  • If you are a smoker or have a serious illness, you may be able to get a bigger payment (due to your shorter life expectancy).

Potential Disadvantages

  • 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 house (or 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.

Important points

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
While equity release plans can be a good way of cutting inheritance tax bills, they will also reduce what your 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 it with 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 an equity release plan. They 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.

Alternatives
You may have other assets or investments which 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 risk
Look for plans carrying the SHIP logo (for Safe Home Income Plans). SHIP is an industry body 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 property 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 waiting a few years before 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 about schemes paying monthly incomes – you may not live long enough to get a decent return.

Costs
The equity release market is becoming more competitive. 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 these may 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 in particular will 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 your 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 an appointment.

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