Are your clients sitting on their biggest assets? Roddy Kohn explains what equity release is and explains all the options for them
For many people, a large proportion of their wealth is tied up in the home they live in. The value of their home may be significant while their income is modest. Equity release simply enables a homeowner, over the age of 55, to use the value of their home to provide them with a lump sum or income that can be used to increase their standard of living. It can also have inheritance tax benefits.
Lifetime mortgages and home reversion plans are the two main types of equity release. Both provide the homeowner the right to live in their home until they die or move into permanent, long-term care.
A lifetime mortgage is a loan secured against your home. The loan is not usually repaid until the last survivor dies or permanently moves into a home. The interest on the loan can either be paid monthly or it can ‘roll up’; that means it is added to the outstanding loan amount.
A home reversion plan is not a loan and therefore no interest is paid. Instead, you sell a proportion or all of your property to the provider. When the property is sold (after the borrower dies or permanently moves into a care home) the provider receives their share of the sale proceeds.
It is important that before your client embarks down this route they receive advice from a qualified practitioner.
Lifetime mortgages: three main types
Roll up: This is a loan secured against your house. It allows you to release a lump sum of cash from the value of your property. There is no requirement to make regular monthly repayments. The amount you have released, plus interest, is repaid from the money generated when the property is sold. Usually this is when you die, move into long term care or leave the property permanently. Interest is ‘rolled up’, meaning you pay interest on interest, which can increase the amount of your loan very quickly.
Drawdown lifetime: Similar to the ‘roll up’ lifetime mortgage, but with greater flexibility. Rather than take one lump sum you can release cash over time as and when you need or require it. As you only pay interest on the money withdrawn, the loan amount will grow more slowly. It can be a much more cost-effective plan.
Interest serviced lifetime: This is essentially an interest only mortgage. In exchange for the lump sum, you make regular interest payments to the lender.
On death or on moving permanently into care only the capital borrowed would need to be repaid. This will be beneficial to the preservation of the value of your estate as interest is not compounded.
Home reversion plans
A home reversion plan is where you sell a percentage or all of your home to a reversion company in exchange for a lump sum (or a series of lump sums). You are effectively given a lease that provides you the right to remain in your home rent free (or a nominal fee) until you die or permanently move into care.
It is important you engage a solicitor to ensure the terms of the lease are favourable and that you understand what is expected of you in terms of maintaining the home, etc.
Upon death or upon moving permanently into care, the home is sold and the reversion company receives its percentage of the proceeds. You would typically receive between 20% and 60% of the market value of your home depending on your age and state of health. This is because the reversion company is taking a risk on house prices and does not know when it will receive the proceeds.
Pros and the cons of equity release
- Any funds released are tax free.
- You still own your property until you die or move into long-term care.
- Your property cannot fall into negative equity.
- Cash released can be used to repay other debts and generally improve your quality of life.
- You can gift money to relatives which will decrease the value of your estate (subject to the potentially exempt transfer rules) and therefore can be a good method of inheritance tax planning.
- Why not move house? Moving to a cheaper property may be a better option than an equity release plan.
- Could you instead consider ‘rent a room relief’ to provide you with an extra £7,500 per year tax free.
- Equity release will reduce the value of your estate and therefore reduce any inheritance for your beneficiaries.
- Plans are not available until age 55.
- Your health may affect the amount you can borrow.
- The lower your age, the higher the interest rate charged, or the lower the percentage of home market value offered, as the companies have to wait longer for their capital repayment.
- Means tested benefits may be affected.
- If you currently have a standard mortgage, you can still apply for an equity release plan, however, the capital received will need to repay your outstanding loan.
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