Equity Release

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Introduction to Equity Release

If you’re over the age of 55, equity release offers you a way to use the value of your home to raise money. It is advised that you seek Independent Legal advice before entering into a legally binding equity release contract.

Types of Equity Release
There is a range of equity release schemes available on the market offered by reputable equity release providers, and they fall into two main categories: 1. Lifetime Mortgages 2. Home Reversion Plans Each type of equity release scheme facilitates a different method of releasing the equity in your home, and there are various other useful features available to create the ideal equity release scheme for you.

Lifetime Mortgage

A lifetime mortgage is a form of equity release scheme whereby a loan is secured against your property, providing you with a tax-free cash lump sum or a regular income to spend as you wish.

Although there are Lifetime mortgages where you pay the interest (and possible capital) as it accrues, commonly Lifetime mortgages are arranged on a roll-up basis, meaning that borrowers will not be required to make payments during the term of the loan, instead the lender adds the interest that accrues to the original loan amount. ‘Roll-up plans’ can be very useful, but borrowers must remember that the amount of the mortgage debt can increase quickly due to ‘compounding’ – i.e. you will be charged interest on the original loan and any interest that is added to the loan account.

Interest is added to the lifetime mortgage loan throughout your lifetime, accruing at a fixed or variable rate. The loan plus interest is eventually paid back when the home is sold which could be when you move into long term care, or when you and your partner die. Subject to your age you can typically release between 18-50% of the value of your home with a lifetime mortgage.

Advantages of a Lifetime Mortgage

Choose a cash lump sum or regular income, typically with no monthly repayments to meet

You still own your home so all growth in the value (if any, of course) belongs to you

Loans with 'No negative equity' guarantee are available

Some plans enable you to guarantee an inheritance for your family

Plans can be taken out as young as 55

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Disadvantages of a Lifetime Mortgage

Inheritance amount will be reduced

Interest rates may be higher than for normal mortgages due to the long-term nature of the loan.

The amount owed on the loan can mount up quickly as interest is compounded.

Early repayment charges may apply

Tax position and certain state benefits will be affected

You could raise a larger amount with a reversion plan, especially at a younger age

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Home Reversion

With this plan you sell part of or your entire home to a reversion plan company in exchange for a tax-free cash lump sum and a guaranteed lifetime lease with no monthly repayments to meet. You can stay in your home either rent free or by paying a nominal rent for as long as you choose, and you can guarantee an inheritance to your beneficiaries. Both you and the reversion scheme company share in any increase in your property’s value, providing you have not exchanged 100% of its value.

Advantages of Home Reversion

No monthly repayments to make.

You know what proportion of your home will be used at the outset.

You can leave a fixed proportion of equity to your estate.

Flexible home reversions now allow you to release the right amount for your needs today, whilst having a guarantee of further cash releases if or when required in the future.

You benefit from any increase in value of the percentage of the property that you still own.

May be available to those aged 55+ and you can typically raise more money from your home at a younger age with a reversion plan than a lifetime mortgage would allow.

You'll be able to release more money the older you are.

You can usually still move home (subject to certain restrictions).

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Disadvantages of a Home Reversion Plan

You do not typically receive the full market value of the share of the property you sell. This is due to the fact that the reversion plan company gives you the absolute right to live in it rent-free for the rest of your life. They, however, do not make their return on investment for a number of years.

You only benefit from any rises in house prices on the proportion you still own.

Reversion plans cannot usually be reversed as you are selling part of your home.

Reversion plan providers do not usually guarantee further advances.

If you choose to end the plan early, charges may apply.

Your tax position and eligibility for means tested benefits may be affected.

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Home Income Plan

With a home income plan, equity is released through a lifetime mortgage or a home reversion plan and is automatically invested into an annuity that is built into the plan, to generate an income for life. A cash lump sum may be available in addition to an income, but the amount may be restricted. An annuity is a plan that guarantees a series of payments in exchange for a cash lump sum. The income you receive will depend on prevailing annuity rates, your age at the outset and your gender. The advantages and disadvantages of home income plans largely depend on whether the money is released through a lifetime mortgage or a reversion plan, however annuities have their own set of pros and cons.

Advantages of a Home Income Plan

A lifetime annuity guarantees that the income will be paid for as long as you live.

Income can usually be taken on a level or increasing amount each year.

With a home income plan annuity, you can usually get a higher income than would be payable from a standalone annuity.

You may be able to take some lump sum in addition to the annuity.

The older you are the higher the income.

As interest is repaid automatically, the reduction in the home's value is minimised.

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Disadvantages of a Home Income Plan

You are committed to an annuity as a means of extra income, leaving you no choice of alternatives.

You can lose out by taking a lifetime income if you were to die soon after the plan is completed unless the plan includes protection against this.

You do not have the option of allowing the interest to build up, so the reduced annuity may not improve your financial circumstances greatly.

Home income plans involve borrowing against your home and may work out more expensive in the long term than downsizing to a smaller property.

Home income plans may affect your entitlement to state benefits and grants.

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Drawdown Lifetime Mortgage

Similar advantages and disadvantages as a regular lifetime mortgage, with additional issues that are unique to this kind of equity release scheme. The main difference is that you don’t request the full sum of money available to you immediately. Instead, you decide on a maximum amount of equity you want to release, and ‘drawdown’ the cash in stages as and when required.

Advantages of a Drawdown Lifetime Mortgage

You are in control of your money as you can release cash when it suits you, or you may be able to request a monthly income with no monthly payments to make.

You retain full ownership of your home.

You only pay interest on the amount of equity released from your home, so interest could accumulate more slowly than with a regular lifetime mortgage.

Drawdown Lifetime Mortgage plans may be available to younger people (aged 55+).

Some Drawdown Lifetime Mortgage plans let you guarantee an inheritance for your family.

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Disadvantages of a Drawdown Mortgage

Interest rates are usually higher than on a standard lifetime mortgage.

Reduced amount available to leave as an inheritance.

Interest grows quickly as it is compounded.

If you want to increase the amount of equity released beyond the original amount agreed, you will normally have to apply for a further advance, which is not guaranteed.

If you repay the lifetime mortgage loan early, you may have to pay an early repayment charge.

Your tax position and certain state benefits may be affected.

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Cost of Equity Release Schemes

Take into consideration that when entering into any type of equity release scheme there will be set up costs and ongoing costs which can include:

  1. Arrangement Fees payable to the lender
  2. Legal Fees
  3. Valuation Fees
  4. Maintenance costs - you are still responsible for maintenance of the property
  5. Insurance costs - maintaining adequate buildings insurance