Equity release: top 10 legal questions
The Equity Release Solicitors Alliance (ERSA), a group of established law firms specialising in equity release, was established to promote the importance of specialist legal advice when considering equity release products. It has committed to a charter guaranteeing it will provide the best legal advice to consumers undertaking such transactions.
1. Why are interest rates so high in equity release?
Many people expect the interest rates in equity release plans to follow the same trend as normal residential mortgages. However, this is not the case because of the long-term nature of the mortgage.
Equity release plans are only repayable on the death of the homeowner or at point where they permanantly vacate the property. Clearly, the lender has no way of knowing when this will be and therefore has to be able to fund products on a long-term basis.
Accordingly, it is not possible to follow the Bank of England base rate, as many other mortgages do. That said, rates could come down as more lenders enter the market and competition for business increases.
2. What is SHIP?
SHIP stands for Safe Home Income Plans and is a trade body of equity release providers set up in 1991 to promote and secure the reputation of equity release in the eyes of the public. Membership of SHIP is voluntary - but those providers who sign up to SHIP must comply with the SHIP code and give certain guarantees to their equity release borrowers.
All borrowers taking a SHIP approved equity release plan must obtain advice from an independent qualified legal advisor prior to completing the equity release plan. This ensures that the borrower fully understands the legal implications of the equity release prior to completion.
3. Will I be able to live in my home for the rest of my life?
Yes. All lenders belonging to SHIP, which accounts for about 90% of the equity release marketplace, guarantee that you can remain living in your property for as long as you want to or need to.
If you decide to move in to long-term care or live with relatives, your property would need to be sold at that stage to allow the loan to be repaid. However, it may also be possible to arrange for care in your home, subject to the lender's criteria at that time.
4. What happens if I want to move house in the future?
The SHIP guarantee provides that you are allowed to remain in your property for life, provided the property remains your main residence, so there is no compulsion on you to move, unless you wish to.
However, if you would like to move, for instance to a smaller property, then the SHIP guarantee also provides that you have the right to move your plan to another suitable property without any financial penalty, so, if you are moving and buying another property and transferring the plan, then you can do so without penalty.
Please note that if you are moving into a less expensive property, you may have to pay back part of the outstanding mortgage.
If you want to move and sell the property but not transfer the plan to that other property, for instance because you are moving in with family or into a residential home, then the mortgage will have to be paid off in full. In those circumstances, you should always check the terms and conditions of your particular plan, to see if there are any payments due to the lender for early redemption.
This also applies to a partial redemption, referred to in the previous paragraph.
5. Why should I use a specialist lawyer?
Equity release is a specialised area where it is important that you receive good quality legal advice from a qualified lawyer who has experience within equity release. This ensures that you receive full and balanced independent advice while benefiting from competitive fees, which can be offered due to the efficient process they are able to offer.
A specialist has full knowledge of equity release products from a legal perspective and streamlined systems which facilitate for a speedy completion.
6. Will my name still appear on the title deeds as the owner of the house?
Yes - If you accept a lifetime mortgage offer then you will continue to own your property. The lifetime mortgage lender will place a charge on the property title as a means of protecting their financial interest.
A home reversion plan is slightly different as it will involve selling part, or all, of your home to a private reversion company. For example, if you sell 100% of your home to a reversion company, then they will become the new legal owners and be named on the property title.
7. What happens if the lender collapses?
If the lender collapses before the loan is completed, your financial adviser will try to find an alternative lender. If the lender collapses after the loan is made your equity release plan will, inevitably, be passed on to a new organisation.
That new organisation will be bound by the terms and conditions of the original loan and will not, for example, be able to force you to repay the loan other than in the same circumstances that applied to the original loan.
8. Is there a chance that my family might inherit any debt?
As a general rule, the debts of a deceased person are paid from any money or other assets they leave behind - surviving family members would usually inherit the net amount after payment of all debts.
However, with certain types of equity release products - those that offer a ‘no negative equity’ guarantee - the equity release provider agrees not to claim against any asset other than the property from which the equity was released.
All SHIP plans carry such a no negative equity guarantee so their customers will never owe more than the value of their home and no debt will ever be left to the estate.
9. Will equity release affect my benefits or tax position?
You should always discuss your particular circumstances with a specialist Independent Financial Advisor, as everybody’s circumstances are slightly different and individual to them, but, as a general rule, the position is:
If you take out a plan on your house, then the equity (i.e the value left in that property) is reduced by the amount of the plan taken out and, consequently, the value of all your assets, which will be left on death is reduced accordingly.
Therefore, this also reduces any inheritance tax that would otherwise be payable. Currently, the value of a persons estate is only subject to inheritance tax, if it exceeds £312,000.00.
* Pension and state benefits
It depends on whether your benefits are means tested or not as to whether taking out a plan could affect those benefits. For instance, an equity release mortgage or reversion plan, will not affect your state pension or any income from an occupational pension scheme or personal pension.
On the other hand, pension credits and other state benefits are means tested and may be affected if your income or savings will rise above the limits specified by the government, as a result of your equity release plan.
Assuming the equity release plan is not being taken out to assist in a purchase of a house, flat or transfer of ownership, then there will be no stamp duty to pay. This is the position as at April 2009, although you will appreciate that tax rules do change from time to time, for instance at the Budget.
10. Do I have to change my will if I enter into an equity release?
An equity release plan will have a financial impact on the value of your estate following your death. The amount of any gift, legacy or donations you intend to make could be affected and it would therefore be prudent to take your equity release plan into account when writing or redrafting your will.
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.
The circumstances in which a property is worth less than the outstanding mortgage debt secured on it. Although it traps householders in their properties, the Council of Mortgage Lenders (CML) says there is no causal link between negative equity and mortgage repayment problems. At the depth of the last housing market recession in 1993, the CML estimated 1.5 million UK households had negative equity but most homeowners sat tight, continued to pay their mortgages and eventually recovered their equity position.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
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.
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.
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.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.