Equity Release

What are Equity Release Schemes?

Equity Release schemes can offer tax free lump sums and/or regular income to homeowners with equity locked up in their homes.  There are a range of different equity release schemes available.  Most of which work on the same basic principle, they give you money now, in exchange for a share of the proceeds from the eventual sale of your home when you (or for joint schemes, when the last person) die.

There are a number of advantages and disadvantages with Equity Release schemes, which you should consider carefully before committing to an equity release scheme.

How Much will I Receive from an Equity Release Scheme?

Lump sums can be up to £500,000 or more depending on the value of your home and any outstanding mortgage. The actual amount may also be affect by other factors such as your age.  The quickest and easiest way to find out how much you could release, is to use an equity release calculator. There are many equity release calculators available online for free.

The full amount released through an equity release scheme is available to you tax-free, however as menioned above, the amount may be reduced by any outstanding mortgages or loans secured against your home.

Depending on the type of equity release scheme you are considering, you may be able to raise further finance in the future when required.  For example, Flexible Lifetime Mortgages allow you to agree a borrowing amount, but then only take a proportion of this initially, leaving you to drawdown further lump sums as required in future.  With Home Reversion Plans, you can sell a share of ownership of your home initially, and then sell further shares for additional cash lump sums later on.

General Criteria to Qualify for Most UK Equity Release Schemes

As a general requirement, either you, or the yougest person in joint cases, must meet all of the following criteria:

• Be over 55 years of age
• Have no outstanding mortgage against your property, or a relatively small mortgage
• Own a property in good condition worth at least £70,000

Advantages of UK Equity Release Schemes

• No need to move home
• A way of raising finance with no obligation to repay the amount borrowed for the remainder of your life
• Some schemes can be used to cover the costs of care homes when the time comes that you, or your partner, need it
• There are certain tax advantages associated with releasing the equity from your home while you are alive, rather than leaving it to your family when you die

Tax Advantages of UK Equity Release Schemes

Any lump sums and/or income received from uk equity release schemes is not subject to tax in the UK.  However, income arising from the subsequent investment of any lump sums or income will be subject to UK income tax under normal rules.

Inheritance tax is normally payable on estates with a value exceeding £325,000 (tax year 2009/10), which includes the value of your home.  By releasing equity from your home before your death, for example via an equity release scheme, you can reduce the value of your estate, and thus reduce the inheritance tax bill left to your inheritees.  However, if you intend to gift any lump sum received from an equity release scheme to anyone, you may still incur inheritance tax charges.  An Independent Financial Advisor (IFA) can provide further information and advice on the tax effects of uk equity release schemes.

Disadvantages of UK Equity Release Schemes

Inevitably, all equity release schemes will reduce what your family will inherit upon your death. It is important that you consult your family prior to entering into any equity release scheme.

Always keep in mind that companies offering equity release schemes are ultimately doing so to make a profit, which inevitably will be paid by you and/or your family.

If you receive means-tested state benefits, these could be lost or reduced if you enter into a uk equity release scheme.

What are the Costs of UK Equity Release Schemes?

Interest rates offered on mortgage-based equity release schemes, such as Interest Only Mortgages and Lifetime Mortgages are significantly higher than ordinary Mortgages.  You will therefore be paying higher interest costs by partaking in such equity release schemes.

Most schemes involve various professional costs, such as valuation fees, legal fees etc.  These costs may be borne by you, although they may be refunded by the equity release provider if you go ahead with the scheme.

You will remain responsible for maintaining and repairing your home for the remainder of your life.  You will be required to keep your property in a reasonable condition. This is required to protect the lender’s investment.

How can you Protect Yourself?

SHIP (Safe Home Income Plans) is a professional body that exists for the purpose of promoting safe equity release schemes.  Equity release companies which are members of SHIP offer a number of guarantees such as:

• the right to live in your property for life - so that you can rest assured that you can never be kicked out of your home for the lender to realise their investment
• the freedom to move properties without penalty - so that you won't be restricted to living in the same house should you want or need to move elsewhere
• a guarantee that you can never owe more than the value of your property - so that you can never end up with negative equity should you house fall in value, or you live longer than the lender expected

Look for companies displaying the SHIP logo.

Types of Equity Release Schemes

There are 3 main types of equity release schemes:

• Home Reversion Schemes
• Interest Only Mortgages
• Lifetime Mortgages

Alternatives to Equity Release Schemes

Since equity release schemes will reduce the inheritance of your family, your family may find it more beneficial to help you out financially, in exchange for inheriting the full value of your home when you die, rather than a reduced amount as would be the case if you release equity now.

You may have other assets which can be sold, or used to raise alternative finance, thus providing you with the immediate cash lump sum and/or regular income you require.

You may be able to release equity from your home by moving to a less valuable property.  This strategy may be more appropriate if, for example, you live in a large property but no longer need the extra space for your family if your children have moved out.

Other Considerations

You may wish to move or sell your home in the future.  Either to downsize to a smaller home, move closer to family, or even move into a care home.  You should check whether any plan you are considering allows this.  An IFA can help with this.

What can an Independent Financial Advisor (IFA) do for you?

The Financial Services Authority (FSA), the UK’s chief financial watchdog, recommends getting independent financial advice from and IFA before proceeding with any equity release schemes.

An IFA can:

• recommend specific equity release schemes which fit in with your needs and your current financial situation
• look at your current financial situation and suggest alternatives to equity release schemes
• can give you more details about specific equity release schemes you may be considering, including the risks, rewards, and the likely costs

Further Reference

• Financial Services Authority (FSA)
• Safe Home Income Plans (SHIP)
• Equity Release 365
• Equity Release UK
• Equity Release Advice UK
• Your Money
• This is Money
• Money Page
• Money Extra
• Learn Money