Equity Release

If you are over 55, a homeowner and have lived in your home for a long-time the chances are you have a significant amount of your money tied up in the property.

It is also possible that you would like to be able to use some of this cash for other purposes such as buying the odd luxury, having an exotic holiday, getting that much needed home improvement, or just paying your day-to-day expenses. At the same time you do not wish to move or sell your home.

If this is the case, a possible solution could be an Equity Release scheme, also known as a Cash Release scheme. The following is a general overview of Equity Release schemes.

Equity

The part of your home that you actually own is referred to as your “equity”. To calculate this you need to deduct any outstanding mortgages from the current value of your property. For instance, if your property is valued at £300,000 and you have no mortgage whatsoever your equity is £300,000 or 100%. However, if you have an outstanding mortgage of £30,000 your equity would be £270,000 or 90%.

The equity you have in your property can go up and down as property prices and mortgage rates fluctuate. To calculate the equity you currently have in your property just type in the value of your property and any outstanding mortgage into the equity calculator below, click on calculate for the result:

Equity Release Scheme

An Equity Release Scheme allows those of us who are 55 or older to turn some of that equity into cash, either as a lump sum or as a regular monthly income. As the equity is yours already there is no tax payable, you can do what you like with the money you receive and there are no regular payments to make. At the same time you can still own and live in your home.

Equity Release: Advantages and Disadvatages

The following are general advantages and disadvantages of equity release schemes:

Advantages

• A significant amount of cash can be made available as a lump sum or as a regular income, with further sums possibly available.
• Apart from initial charges there are no payments required until the property is finally sold.
• The equity released is tax-free.
• You can remain in your home for the rest of your life.
• Subject to provider terms, you can move home.

Disadvantages

• The value of your estate will be reduced, possibly to zero.
• Equity Release can be more expensive than other options.
• Although the cash released is not taxable it can reduce your rights to means tested benefits and tax allowances.
• Equity Release is a long-term commitment; if your circumstances change it may be expensive or impossible to cancel the agreement.
• The amount providers are willing to supply may not be sufficient for your needs.
• You need to ensure the building is well maintained and appropriately insured.

Equity Release Providers and Criteria

The providers of Equity Release schemes will offer you different types of schemes depending upon particular criteria they apply. The basic criteria are:

• You are a homeowner
• You, or you and your partner, are 55 or older. This can vary dependant upon the type of scheme offered.
• The value of the property needs to exceed a certain value. This can vary, with £50,000 - £80,0000 being the norm.

Other criteria that may be applied and can affect the type of scheme and amount offered include:

• The property needs to be in good order.
• The property needs to be of conventional construction (bricks and mortar).
• There cannot be tenants in the property who have rights under the Rent Act.
• There must be appropriate buildings insurance cover.
• Ideally, the property should be mortgage free, if not you may be required to clear the current mortgage as part of the relevant Equity Release scheme.
• If the property is leasehold, a minimum period of lease remaining is required. This is usually 75 to 80 years.
• Your current health and life expectancy.

There are no “standard” contracts and any of the above could have an impact on the type of scheme and conditions you may be offered; therefore, it is very important that you discuss your particular situation with your Equity Release adviser before signing any agreement.

Types of Scheme

There are two types of Equity Release schemes that are usually on offer:

Lifetime Mortgage

This is the most popular and is a loan secured against your property. For more details click here.

Home Reversion

With this type of scheme you sell a percentage of your house in return for a lump sum or monthly income. For more details click here.

Both of these can provide you with a lump sum or income, but they work in different ways. Whether either would be suitable for you is dependent on your age, your current circumstances and requirements. All of which should be fully discussed with your Equity Release advisor.

Home Income Plan

The equity released from your property can be supplied as a lump sum, a regular monthly income or possibly both. You can of course take a lump sum and then purchase an Annuity. Alternatively and probably more effective would be to opt for a Home Income Plan, which can be applied to a Lifetime Mortgage or a Home Reversion scheme.

With a Home income Plan your provider automatically initiates the annuity and pays you the monthly income. The benefits of this are that you do not have to worry about organising the annuity and the rates offered by equity release providers are generally higher than you will be able to obtain in the annuity market. Once again, there are no “standard” Home Income Plans so be sure to check with your adviser that you are getting the best deal possible.

 

Please Note: Club50 are not specialists in Equity Release and we advise all reads considering such schemes to consult with an Equity Release specialist. An Independent Financial Advisor (IFA) regulated by the FSA will be able to directly advise you or put you in touch with an appropriate Equity Release specialist.

 

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