Equity release: good or bad?
Q: Please can you provide some information on equity release, as I have heard both good and bad things about it. I would be very interested in a professional opinion on the subject.
A: Richard Morea is technical manager at London and Country
Lifetime mortgages allow you to release part of your equity, which is repayable on death or the sale of the property, along with the rolled-up interest. The amount repayable depends on the initial sum borrowed and the number of years before the loan is repaid.
With a home reversion plan, you sell a percentage of your property to the equity release provider, at a discount to its current market value.
You can continue to live in your home rent-free, but on your death or the sale of the property, the provider reclaims its share in the property plus any growth in its value.
The benefit of this method is that you sell only a fixed percentage of your home, albeit at a discount.
Equity release is usually only available for borrowers aged 65 and over, although a few lenders will consider applicants from 55.
The schemes are most suited to those who are asset-rich and cash-poor, particularly if they have no children or other dependents to benefit from their estate on death.
Lifetime mortgages are considered more suitable for older borrowers as there is likely to be less interest rolled up before death or sale of the property, but of course there is no way of telling how long you will live, so the interest could still be significant.
Although a no-negative guarantee would ensure you never owe more than the value of your home, interest payments could eat up much, if not all, of the remaining equity.
If you are using the equity that is released to supplement your income, you need to check whether it might result in a reduction in your entitlement to some state benefits. Overall, much will depend on the options open to you and how acute your needs are.
If you are considering equity release you should always seek specialist advice, and ensure the provider is a member of SHIP (Safe Home Income Plans) – as a member, it will have to adhere to a code of practice.
The Consumer Financial Education Body's Money Made Clear documents provide a clear and unbiased source of information. Go to moneymadeclear.org.uk
An equity release scheme, where the money borrowed against equity in the property (up to a maximum of 50%) is subject to interest charges and although the borrower makes no payments during their lifetime, the monthly interest repayments will roll up and be added to the original debt, which will be settled on the borrower’s death. A lifetime mortgage is distinct from a home reversion scheme in that the lender never owns part of the property. But most lifetime mortgages are sold with a no negative equity guarantee. This means that if the loan is greater than the property’s value it’s a problem for the original lender and not the homeowner.
Home reversion plan
An equity release scheme whereby you sell part or all of your property to a home reversion provider, in exchange for a cash sum or income and you are guaranteed occupancy for life. On your death, the agreed proportion of the proceeds from the house sale reverts back to the provider and the rest is distributed to family. Although you don’t repay the loan until you die and have lifetime occupancy, the cash raised will not reflect the true value of the part of the property sold and you lose the right to any future growth in the part of the property you sold.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
A term to describe financial products or ‘plans’ that help older homeowners turn some of the value (equity) of their homes into cash – a lump sum, regular extra income, or sometimes both – and still live in the home. There are two main types of equity release: lifetime mortgages and home reversion plans (see separate entries for both). Whichever type you choose, you borrow money against the value of your property, on which interest is charged, and the loan is repaid when the house is sold after your death.