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All you need to know – Equity Release Plans
If you have owned your home for many years the probability is that it will be worth considerably more now than when you bought it.
If you are over age 55 an Equity Release Plan allows you to turn some of the value of your home into tax-free cash and give you the freedom to spend the money as you choose plus the ability to remain living in your own home.
It is important to realise that such plans may affect the amount of inheritance that you will leave to your friends and families. You must take legal advice before proceeding and involve your family in your decision.
There are broadly two types of Equity Release Plans – lifetime mortgages and home reversion plans.
Under a lifetime mortgage you will continue to own your home
Based on your age and the value of your property you agree with the provider what amount they are prepared to “loan” to you against the value of your property. The older you are, the higher the percentage of your property’s value you can borrow (at age 65 normally around 1/3rd of your home’s value)
You can choose to take your cash as a one off tax-free lump sum, or as smaller amounts over a number of years.
If you choose a single cash lump sum at the start, the amount you owe can grow quickly. If you take smaller sums over time the amount you owe will grow more slowly because you only pay interest on the loan when you actually release the money from your home.
You take out a lifetime loan (i.e. effectively a fixed rate mortgage with no end date) for this amount
You can choose to pay the interest monthly, or make no monthly payments and roll up the interest into the loan amount.
If you choose to roll up the interest then when you die, or go into a care home, the compounded interest is added to the amount you borrowed and repaid from the sale of your house.
Obviously the longer you live the more the interest will roll up and therefore the greater the amount that will be deducted from the value of your property on re-sale (although hopefully house prices will also rise over that time).
If house prices fall your estate could end up being liable for any shortfall but to avoid this most lifetime mortgages carry a ‘no negative equity guarantee’, meaning that the repayment amount won’t exceed the sale proceeds of your property.
Home Reversion Plans
Under a home reversion plan you sell part or all of your property to, or through, an investment company for an amount payable either as a single cash sum or as regular instalments
The amount you get will be less than the full market value of your home, because the buyer cannot re-sell the property until you die or move permanently in to long term care.
The minimum age for these plans is usually higher than for lifetime mortgages.
You don’t normally pay rent, or if you do it is a nominal amount.
If you have sold all of your home the investment company will benefit from any rise in the value.
If you have made a partial sale you would benefit from any rise in value of the part that you continue to own
When the property is eventually sold, the investment company takes the proceeds of the percentage that it owns and the remainder goes to you or to your estate.
Why People Choose Equity Release Plans
The Equity Release Council’s latest figures show that last year £1.4bn was released through these plans, the highest figure since records started in 1992.
There are a variety of reasons why you might take out equity release plans including:-
- To supplement your pension income
- To carry out essential but expensive home improvements
- To take a holiday of a lifetime
- To visit family or friends who have emigrated
- To financially help your children or grandchildren onto the property ladder
- To settle a repayment mortgage or clear the balance on an interest-only mortgage
- To improve your standard of living
- To see your family enjoy their inheritance while you’re still here
- To pay off other outstanding debt and lower your monthly outgoings.
- If you have no dependents so are not worried about reducing the value of your estate
An alternative method of releasing equity is of course to downsize to a less expensive (normally smaller) home and thereby release all the cash in your family home. There will be costs associated with downsizing – legal, estate agency, moving and probably stamp duty but it also means that you have a home to leave in your will.
If you have an outstanding mortgage or any loans secured against your home, you will need to pay these off completely with any equity you release.
Equity release is not right for everyone. It may affect your entitlement to state benefits and will reduce the value of your estate but in certain circumstances it can be of benefit.
If you have any comments on the above or experience of Equity Release Schemes that you would like to share please contact us at thehomecloud.xenacia.com