If your parents or relatives own their own home, then equity release can seem to be a great way to release funds 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 surviving 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.
Types of Equity Release
There are two types of equity release: lifetime mortgages and home reversion plans.
- 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 (drawdown plan) 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 generally 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.
- The home may need to be sold to settle the outstanding debt, so it is important that the whole family understands the implications before the arrangement is set up.
- Many Lifetime Mortgage providers will offer what is known as a “drawdown plan”. Under this type of plan, your property is assessed and the maximum amount that is available to you is established – known as your lifetime allocation. You can then draw against this allocation as and when needed, helping to keep interest charges to a minimum.
Home Reversion Plans
- A Home Reversion Plan involves the transfer of ownership of all or part of your home to a provider and you receive an agreed percentage of the value of the portion transferred. Plans vary: some involve paying a nominal rent whilst others provide rent-free occupancy.
- When the property is sold – either during your lifetime or on your death – the provider will receive the value of their share of the property at that time.
Equity Release Considerations
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/.
Poundbury Wealth Management LLP offers expert financial advice in investment planning, pensions, inheritance tax planning and long term care planning. Contact us at www.poundburywealth.co.uk or call 01305 266866.
Partner Tim Gallego is a member of The Society of Later Life Advisers (SOLLA), a not for profit organisation set up to meet the need of consumers, advisers and those who provide financial products and services to the later life market.
The Partner Practice represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group’s wealth management products and services, more details of which are set out on the Group’s website www.sjp.co.uk/products. The ‘St. James’s Place Partnership’ and the titles ‘Partner’ and ‘Partner Practice’ are marketing terms used to describe St. James’s Place representatives.
Equity release may involve a lifetime mortgage or home reversion plan. To understand the features and risks, please ask for a personalised illustration.
CHECK THAT THIS MORTGAGE WILL MEET YOUR NEEDS IF YOU WANT TO MOVE OR SELL YOUR HOME OR YOU WANT YOUR FAMILY TO INHERIT IT. TAX AND WELFARE BENEFITS MAY ALSO BE AFFECTED. IF YOU ARE IN ANY DOUBT SEEK ADVICE.