Equity Release
Are you or your parents thinking about taking out an Equity Release product?
Why take out an equity release plan?
So what is an Equity Release plan?
Who can take out an Equity Release Scheme?
What types of property can have an Equity Release?
How do I receive my money?
What are the downsides of Equity Release?
I already have a mortgage what happens then?
What should I look at before taking out an equity release scheme?
What else should I consider?
Do I need advice?
Will I be able to move to another property?
What reasons might I have to use an Equity Release plan?
Are you or your parents thinking about taking out an Equity Release product?
If you (or they) are, then you will want to know how they work and what the pros and cons are. All
these are contained in the explanation below but firstly, you should be aware that virtually all
schemes that fall within the remit of ‘Equity Release’ are authorised and regulated by the Financial
Services Authority (FSA) in the UK.
This means that, providing you get proper advice on which scheme will be best for you (crucial) you
can be confident that the scheme will have been vetted by the FSA and this should mean that there
will be no future problems.
However, there is the possibility that a scheme might be offered that doesn’t fall within the remit of
the FSA and you should check to ensure that it does or it might not be covered by the national safety
nets such as the Financial Services Compensation Scheme (FSCS) and the Financial Ombudsman
Service (FOS).
The FSA give out a leaflet called Equity Release Schemes and on page 2 it highlights that these types
of scheme can be complex and professional financial advice should be sought before making any
commitment. To this I would add please use an independent financial adviser or you could end up
with completely the wrong plan.
Ideally, you should seek out an independent financial adviser who you can have confidence in and
explains things simply without jargon and is fully conversant with all types of equity release plans
and their individual foibles.
Keith Meredith, the author of this guide, has been dealing with equity release since 1994 and has
therefore seen all the possible alternatives good and bad and is able to advise on the best course of
action. This may even be a recommendation not to take out an equity release plan! We do this
quite often because other alternatives are just better. The first hour of our first meeting is at our
expense.
Buying a new property – If you don’t yet own a property you could use equity release to purchase a
more expensive property than you would normally be able to afford.
Inheritance Tax Planning – If you would pay Inheritance Tax (IHT) if you died now, then an equity
release plan might be a good way to reduce your IHT bill and release equity that you could gift to
your children or grandchildren. If it was by using a lifetime mortgage then the roll-up of the interest
charge would increase the debt against the estate and reduce the bill even further. This could be
deemed to be an anti-avoidance measure by local authorities if the donor subsequently goes into a
nursing home and claims financial benefits so seek advice first.
Improving the home and increasing the income – A typical instance is where interest from deposits
has dwindled over the years causing the owner to cut back on maintenance of the home and living
standards. Eventually, the money runs out completely and the only asset left is the home. Money is
then needed to bring the property up to scratch and supplement the pension income to bring the
living standards back to normal. Equity release schemes are perfect for this purpose.
Paying for care fees – Care fees are expensive and most people want to stay in their own home if
possible for as long as possible. Usually, the pension income is only sufficient for normal day to day
living expenses and care in the home means you still have the same expenses as normal but need
additional sums to pay for care and sometimes alterations in the home to be able to continue living
there.
Respite care – You may be fortunate enough to have a loved one look after you effectively free of
charge but this, for them is a considerable burden and having sufficient money to be able to allow
them to go on holiday perhaps and fund professional care for you in the meantime, perhaps in a
nursing home short term is invaluable but probably not possible from normal pension or investment
income.
Helping children or grandchildren before you die – You see the problems that inflict your family
such as a deposit for a house, foundation money for a new business, education fees at school or
university, etc. Why not use some of the money locked in your property to ease their problems in
your lifetime so you can see the benefits for yourself rather than waiting until you pass away?
So what is an Equity Release plan?
It is either a special type of mortgage where interest is not paid (but it is charged) or it is the sale of
some or all of the property depending on the value of it and how much money you need.
The first one is called a Lifetime Mortgage and the second is a Reversion Scheme.
A Sale and Rent Back Scheme is not an Equity Release plan. The FSA leaflet warns that these
schemes should only be considered as a very last resort.
Most people baulk at the idea of selling part of a property and a mortgage just seems to be the
better bet but, because the interest on a lifetime mortgage is not paid off until the property is sold
(which could be a long time) the amount owed on the mortgage could rise to more than the
percentage that a reversion company would own and only hindsight will tell which would have been
the best.
A professional financial adviser will go through these options and explain with tables how various
factors such as house price increases and longevity will impact on the decision making process. He
will also not be biased towards or against any particular scheme.
Who can take out an Equity Release Scheme?
If you are on your own and over the age of 55 then you could be considered for one. Alternatively,
as a couple, the youngest of you has to be over 55 to be eligible.
Apart from that, anyone is eligible if they own their own home and can understand the scheme they
will be taking out.
What types of property can have an Equity Release?
Generally, all standard built properties can be included but, as you can imagine, if the build is nonstandard then the company will want to be certain that they will get their money back so will
investigate all non-standard properties carefully before lending on them.
How do I receive my money?
A lump sum is usually what most people want and there are no restrictions on how you spend it.
Some people might want a smaller lump sum to bring the property up to date and other regular
income sums to supplement their pension income.
Others just want extra income which can be provided either as a true regular income for life or as
small lump sums as and when needed.
Some schemes achieve these objectives better than others and your independent financial adviser
will know which the best is for you.
What are the downsides of Equity Release?
The main downside is that less of the value of the property will be left to beneficiaries of an estate.
This might be a problem emotionally and, as a concept could be a deal breaker. However, as my
blog on the subject demonstrates, most of the equity in domestic properties was caused by inflation
so it’s not as bad as it might seem.
Another potential downside is the growing debt if you choose the lifetime mortgage option.
However, if you are doing equity release to reduce your Inheritance Tax (IHT) bill, then this is a good
thing and will reduce your IHT bill even more. If you are not doing it for IHT purposes then you
should ensure that the scheme you are entering into has a no-negative-equity guarantee. This
means the debt will never be more than the value of the property even if you live ‘till you are aged
120!
I already have a mortgage what happens then?
If you have a mortgage already then, providing the debt is lower than the mortgage you will be
taking out as a lifetime mortgage then you should be able to replace it with the advantage that you
no longer need to pay the interest. This may make the difference between living frugally or normally.
Bear in mind that although the interest is not paid it is charged and will need to be paid when you
move out of the property.
What should I look at before taking out an equity release scheme?
As with all types of financial products, an equity release plan should be considered as one of the
potential options to solve a particular problem.
For instance, if you want to raise a lump sum to supplement your income or improve / maintain the
property then you might want to investigate the following:
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Selling your current home and moving to a cheaper one.
Contact local council or other organisations to check if you could claim money to pay for
home repairs or improvements.
Claim state benefits that you may be eligible for but not yet claiming.
Tracing pensions or investments that you might have lost track of.
Use your savings or sell any investments (after taking professional financial advice first).
What else should I consider?
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Will the income from an equity release affect your income tax position and entitlement to
state benefits? Certain methods of taking income can be more tax efficient than others and
mean you may not lose benefits.
Are you intending to invest a lump sum to provide an income? You may be better off
choosing a plan that has a drawdown facility so you only take what you need and keep the
interest payable to a minimum. This may also be preferable if you are entitled to receive
benefits since the amount you have available can be kept below the level where benefits are
lost. Not all plans have this facility.
What if you want to cancel the plan in the future? All lifetime mortgage equity release
companies will make an early redemption charge usually for at least the first 5 years.
What if the owner dies or moves into a nursing home? There should not be any early
redemption penalties on death or if the owner moves into a nursing home. However,
interest will continue to be charged until the property is sold.
What if I take a partner after I take out the plan? The partner may be able to be included in
the agreement if they are eligible or they may be asked to sign an agreement that they will
move out of the property if the owner dies or goes into a nursing home. This would also
apply to a live-in carer.
Do I need advice?
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You don’t have to take advice, but if you don’t and the scheme you choose turns out to be
unsuitable you will have fewer grounds for complaint.
A financial adviser will charge a fee for his or her services but this is minimal when compared
with the cost of choosing the wrong scheme.
It is essential that you have your own solicitor to act for you to conduct the mortgage or sale
conveyance. They are not authorised to give advice as to which scheme is the best for you.
This can only be given by an authorised financial adviser.
Will I be able to move to another property?
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All reputable firms will offer this feature and, although you will have to pay for the moving
costs including solicitors’ fees and a valuation, the scheme will continue with the new
property.
What is my next step?
Contact Keith Meredith on 01425 600616 or send an email to him at [email protected]
Key words:
Equity release
Retirement income
Safe home income plans ship
Equity release council
Reversion scheme
Lifetime mortgage
Long term care
Respite care
Sale and rent back sarb
Funding retirement
Helping children
Helping grandchildren
Interest roll up
Mortgage repayment
Fund home improvements
Inheritance tax planning
Later life advice
Care funding
Home income plan