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Equity release - careful consideration

Richard Martin, head of the Equity Release Bureau, explains the benefits of equity release once you have decided to release cash from the value of your property.

What is equity release?

For further independent information and a free equity release consultation visit the Equity Release Bureau website or call freephone 0800 988 1289.

Equity release schemes allow you to release tax-free cash from your home to boost your finances in later life. The two main types of equity release schemes are lifetime mortgages and home reversion plans, with drawdown options also available.

All types of SHIP (Safe Home Income Plans) approved equity release schemes allow you to:

  • Remain in your property for life, provided the property remains your main residence;
  • Move your plan to another suitable property without any financial penalty, subject to criteria;
  • Avoid falling into negative equity so you will never owe more than the value of your home and no debt will be left to your estate.

Demand for equity release is growing

The UK housing market may have slowed in 2008, but this follows almost a decade of unprecedented growth in property prices.  As a result, Britons own significant amounts of equity in their homes.

With the rising prices of everyday life, many older people are finding that their pension savings together with the state pension are not providing sufficient income to meet all their needs in retirement.

In this case, many people are starting to consider how equity release can enable them to sustain their quality of life.

Reasons to consider equity release

Common reasons to consider equity release are:

  • make home and/or garden improvements;
  • take holidays;
  • clear debts;
  • clear outstanding mortgage;
  • help family or friends with a cash gift;
  • boost your savings or regular income;
  • reduce the value of your estate to mitigate inheritance tax;
  • pay for care at home.

History of equity release

Safe Home Income Plans were launched in 1991 to promote safe plans and to safeguard the interests of customers through a code of conduct for the industry.

In 2004, lifetime mortgages became a regulated product under the Financial Services Authority (FSA). Home reversions, which are a separate type of equity release product, were regulated in 2007.

More than £1bn in equity release loans was taken out by customers in 2008 and this figure is expected to grow significantly over the next few years.

Different types of equity release

There are currently over 40 SHIP approved equity release schemes, and you can save your estate thousands of pounds if you choose the right one.

That’s where independent advice and research is crucial. An Independent Adviser will research the equity release market on your behalf and is duty bound to recommend the most suitable equity release plan for you.

Here is an overview of the different types of equity release.

Lifetime mortgages

These allow you to take out a loan on your property in return for a tax-free lump sum, an income or a combination of the two. Much like a standard mortgage, the loan is secured against your property and you continue to own your own home.

The amount you can release depends on a combination of your age, health and the value of your property.

There are several ways a lifetime mortgage can work:

Roll-up. This is where the interest is not paid back on a monthly basis to the lender but rolls up over time.

The loan and the rolled-up interest are repaid either when your home is sold, on your death, or if you move into long-term care. There are no repayments to make during the life of the loan and both members of a couple are covered, so if one goes into long term care before the other, the other party can remain in the house until they die or move into long term care themselves.

Flexible Drawdown.You have the choice of receiving either a cash lump sum or money in smaller amounts as and when you want.

Your choice of product will determine how quickly the interest grows on the loan. Taking a Drawdown product may reduce the total interest cost over time and prove more cost effective than taking out a large lump sum at the start.

Interest-only. This is where you pay monthly interest on the loan and the loan sum is repaid when the house is sold, on your death or if you move into long-term care.

In some cases it is possible to pay monthly interest only on a loan and then roll this up when it is no longer affordable to make monthly payments.

Home reversions

This type of equity release involves you selling all or part of your home to a company in return for a lump sum or regular income and the right to remain living there.

When you die or move into long-term care, the company will be entitled to its share of the property’s value at the prevailing market rate. The balance of the property that you didn’t sell goes to your estate.

The amount you can raise from a home reversion scheme depends on your age and that of your partner but it tends to be between 35 and 60 per cent of the market value of the property.

Next steps

After having done your research and you feel equity release is right then these are the steps you should take:

Make sure you’re eligible. You need to be a homeowner and no younger than 55 to qualify.

Find out the value of your home. This will help you find out how much you may be able to release.

Check how the money released may affect any state benefits or your tax position. Any equity you take from your home is tax-free. However if you should invest this, any interest you receive may be taxable and may affect your tax position. A financial adviser can help you with this.

Talk frankly to your family as it will affect their inheritance, but the decision to release equity must be yours.

Consider how releasing the money would affect your options for moving home or selling in the future. For instance if you want to downsize you may have to pay a proportion of the equity you have released back to the provider of the scheme.

Decide on the type of adviser you want to deal with. All SHIP members products are regulated which means there are strict controls via the FSA on the advice you receive. There are three broad types of advisers and they will explain their role in their first meeting with you.

  • Advisers who can only advise on the products of a particular equity release provider;
  • Advisers who only advise on a limited number of products;
  • Advisers who can provide advice on the different products across the whole market.

For further independent information and a free equity release consultation visit the Equity Release Bureau website or call freephone 0800 988 1289.

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