Many seniors in the UK are in the position of owning homes which have increased in value since purchase. They therefore can have considerable capital value in their home, but may be facing lower incomes in future due to retirement. The home can be used as a source of income, and for some people this can be a huge benefit – around £1.4 billion was raised this way during 2007.
Each person’s circumstances will differ, and before taking steps to release equity from a home it is vital to take good advice – the schemes are either expensive or impossible to put into reverse, and any action here will have an impact on money available to leave as an inheritance.
It also makes sense to consider alternatives before taking an equity release scheme. Selling the home and downsizing may be more sensible, especially if the house larger than needed now that children have left home – if they have! Keeping on a larger house will mean that all of the running costs will remain at the level of the larger home, and there could be considerable cost savings moving from an older, larger house to a smaller, perhaps more efficient new home. Purpose-built retirement flats and houses are now appearing in many excellent locations, and in later years these may be easier to live in and maintain than staying in the family home.
Nevertheless, many people will want to stay in their home, and still gain benefit from its increase in value. This is where equity release can help.
There are two broad types of equity release – either you retain full ownership of the property and take out a mortgage on it, or you sell part or all of the house but continue to live in it for the rest of your life, or until you choose to leave. They have different advantages and drawbacks, and really it is up to the individual to decide which is best for their circumstances. Mostly the qualifying age for these schemes is 55 or above, and in most cases the age of any partner will also be taken into account. In general, the younger you are, the less money you can expect to be offered.
With a Lifetime Mortgage, you retain full ownership of the property, and the mortgage provider gives you either a lump sum, or a monthly payment. Unlike a normal mortgage, you do not have any monthly payments to make to the mortgage provider. The amount owed to the mortgage provider will increase with time, as interest is charged on and added to the money you take out, so the longer you have the mortgage, the more it will cost – but on the other hand, if the property increases in value, then you have more money to pay back the mortgage at its end. It is generally possible to ensure that money is available for inheritance if you die while still owning the property.
If you do decide to move from the property before the end of the mortgage period, there may also be a penalty charge to add to the mortgage you owe.
Two important points: these mortgages are regulated by the Financial Services Authority, and you should be given a guarantee that there will be no risk of a Negative Equity situation – where the value of the mortgage could be more than the value of the property. This is really important for peace of mind.
The other main scheme is a Home Reversion plan. With this scheme, you actually sell part or all of your home to the finance company. You then do not own the whole property, but you are given a lease on it for the rest of your life, and you make no monthly payments. They provide you with a cash sum, and if you only sell them part of the property, there is still money to be passed on as inheritance.
Since you continue to live in the property after you have sold it, the company will not give you the full market value of the property, and generally the valuations for this kind of scheme are lower than for the Lifetime Mortgage. However, they will often pay out a higher total sum.
The consequences of a rise in property value is also different. With the Lifetime Mortgage, you benefit from the full rise in value, whereas with the Home Reversion you only benefit from the rise in the proportion of the property which you still own - so if you sold half of the property, you get half of any rise in value.
The Reversion schemes are nowadays far less popular than the Mortgage schemes, largely because of the issue of retaining ownership.
The Lifetime Mortgage also offers two options for taking the cash. The simple way is to take the full sum in one go, but it is also possible to opt for a Drawdown Lifetime Mortgage, which means that instead of taking the cash all at once, you can decide to take it progressively, as you find the need for it. The less you take, the less the interest will add up, and many people feel happier with this approach.
Whichever scheme interests you, do ensure that the company offering the scheme is affiliated to SHIP – Safe Home Income Plans. This gives guarantees of the security of the plans, and ensures vital aspects such as the No Negative Equity guarantee, particularly important when the market conditions may suggest that property values could drop, or not increase fast enough to make up for the interest added to your mortgage (this is compound interest, so it does grow quite a bit!).
It is also important to realise that these schemes may affect your ability to make some claims for benefits from the state.
We would also emphasise that these are schemes which are either expensive or impossible to put into reverse once they are taken out. This does mean that you need to do your homework thoroughly before signing anything, and the impact on inheritance means that you may well want to take the views of possible heirs to your estate into the process.