If your parents own their own home, then equity release can seem to be a great way to realise capital without having to move house. Equity release provides either a tax-free cash lump sum or the ability to draw down smaller amounts of money against the value of the property. The money raised against the value of the property is repaid when it is sold. If it is owned jointly the money is not usually repayable until the death of the second partner. Equity release is available if your parents receive care in their own home, or if one stays in the family home while the other receives residential care. There are two main types of equity release schemes:
As with a traditional mortgage this is a loan against the value of the home. It could be a single lump sum or smaller sums over a period of time. The older your parent is, and the greater the value of the property, the larger the sum that can be loaned. There is no time limit or end date to the loan. The total sum is only repaid when the property is sold. As with traditional mortgages interest is added to the sum monthly or annually and most schemes will not let you pay off the interest monthly, but add it to the lump sum at the end.
Home Reversion Plan
A proportion of the value of the property is sold to a home reversion company to provide a tax-free cash lump sum (or sell a percentage first then draw down more by selling more percentages over time). The amount owed is not repayable until the property is sold. So – when the home is eventually sold, your parents or their beneficiaries will only receive the proceeds from their percentage of the ownership of the house.
Equity Release – Eligibility and Considerations
To be eligible for Equity Release the minimum age is 55, and other criteria include outright ownership of the home and to be a resident of the UK. The amounts of money that can be released will be dependent upon age, the value and state of repair of the property (plus its leasehold length) and the health of your parents.
Equity Release Considerations include the expense and flexibility of such schemes; it is advised that most interest rates on equity release products are much higher than regular mortgages, and there could be high penalties to get out of the scheme early. Overall it is advised that other options for raising capital should be explored before going down this route. If you do explore this option, then choose a provider that is a member of the Equity Release Council, http://www.equityreleasecouncil.com/home/ as they will have a No Negative Equity Guarantee (NNEG) and will follow a code of conduct. This will guarantee that the total sum payable (including interest) will not exceed the final sale of the property. Other sources of advice and help include the Society of Later Life Advisers, http://societyoflaterlifeadvisers.co.uk/.
You might also be interested in our section on Annuities.
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