Right then let us talk about all things equity release!
There are various ways you can unlock some of the market value (or equity) in your property. For example, you could downsize to a smaller property or one of lower value - perhaps by moving to a different part of the UK where house prices are cheaper.
Downsizing will give you maximum value from your home, but there may be disadvantages such as the hassle, disruption, and cost of moving. You may also be very attached to the area where you currently live.
Are there any solutions that allow you to stay just where you are?
Equity release plans are 1 option, that allows you to release much-needed cash from your home, whilst retaining the right to live in it for the rest of your life.
If you still have an outstanding mortgage on your property you must pay it off, either by using some of the proceeds from your plan or from other funds. Once that's done, the money you release can be spent as you wish. This could be on holidays, a new car, a new conservatory or meet unexpected situations such as health care.
Most importantly, your equity can help you fund your retirement or provide reassurance that your spouse will have enough to live on when you die.
These schemes can be helpful in certain circumstances but are not suitable for everyone.
Unfortunately, with inflation, rising care costs and living longer, many people find themselves falling short of capital, income or both in their retirement years. For homeowners over the age of 55, you can access a facility to release money from your home called Equity Release. This property must be your main residence to qualify and the scheme enables you to supplement your income without necessarily having to make any monthly repayments.
Retirement Interest Only (RIO) mortgage
This is a mortgage product aimed specifically at older borrowers. The reason is, that these loans have a specific structure that those in retirement will find useful. Sometimes it’s abbreviated to ‘RIO’ and it can be a useful alternative to equity release. It’s designed to benefit someone of retirement age looking to borrow against a home or remortgage onto an interest-only mortgage, It works in a similar way to a standard interest-only mortgage, except that they’re only available for those over a certain age typically 55 and, there’s no end date for the loan. however, the mortgage affordability & stress tests can be quite strict to make sure you can afford the payments.
Lifetime Mortgages and Home Reversion Plans
Both types are regulated by the Financial Conduct Authority (FCA). By using an equity release product, a homeowner can draw a lump sum and/or regular smaller sums from the value of their home, while continuing to remain living in it.
There is plenty of flexibility with Equity Release to use the funds for a variety of purposes, including:
• Adapting/improving your home to enable you to remain living in it independently for longer
• Paying off debts, such as outstanding mortgages or credit cards
• Paying for help around the home, including domiciliary social care
• Purchasing a new car or other ‘large ticket’ items
• Providing financial assistance to your children and grandchildren – perhaps with a deposit on a house or to help them through university
• Taking a holiday of a lifetime, perhaps to visit family living overseas
What is a Lifetime Mortgage?
Lifetime Mortgages enable you to choose to extract your funds in a single lump sum and/or in smaller amounts over time up to the maximum limit agreed with the plan provider. Like a traditional mortgage, you will retain full ownership of your home and you can choose to either pay interest on the loan or defer any payments until after your death, effectively rolling them up to be settled from your Estate value.
The Lifetime Mortgage loan and any interest must also be repaid if you have to move into long-term care or permanent care.
If you are part of a couple, the repayment is not made until the last person living in the home either dies or moves to long-term care. In other words, both you and your partner are free to live in your home for the rest of your lives. You can also elect to retain some of the value of your property as an inheritance for your family, meaning that you can benefit from releasing equity while ensuring you have something to pass on to your children.
How much value can I release from my property with a Lifetime Mortgage Equity Release Plan?
The amount that can be released with a Lifetime Mortgage Equity Release Plan is dependent on your age and the market value of your home. Some providers may offer larger sums to those with certain past or present medical conditions, but generally, you can normally expect to release anywhere between 10% – 60% of your property value.
What is a Home Reversion Plan?
Another way to access all or part of the value of your property while retaining the right to remain in its, rent free is through a Home Reversion plan.
The basic principle of a Home Reversion plan is that the Equity Release provider will purchase all or a part percentage of your house. You will know precisely what portion of your property you have sold and, equally, what has been ring-fenced for later use, possibly to leave in a Will.
The percentage you retain will always remain the same regardless of the change in property values unless you decide to take further cash releases. At the end of the plan your property is sold, and the sale proceeds are shared according to the remaining proportions of ownership.
Again, depending on your age and medical conditions, additional Equity Release sums may be possible with your Home Reversion Plan. You will be provided with a tax-free cash lump sum (or regular payments) and a lifetime lease, guaranteeing you the right to stay in your property rent-free for the rest of your life.
There is no day-to-day interference and no restrictions in treating the house exactly as before as a private home to live in freedom.
Will Equity Release help me with an Inheritance Tax problem?
Equity Release schemes can in some cases enable you as a homeowner to reduce the value of the property on your Estate for Inheritance Tax mitigation purposes, while you are still benefiting from the full value of the property by continuing to live in it.
You may have already put Estate Planning into place that has included putting your home into a Trust and there could potentially be a significant issue if you have already undertaken some Tax or Estate Planning using Trusts, before considering an Equity Release.
Trusts are common and can be vital to secure the well-being of surviving partners, reduce their tax exposure, or ensure that people can direct their wealth where they want when they die.
A common example especially in 2nd marriages is where each partner leaves in the first instance their share of their home in a ‘Life Interest Trust’ to their current partner. This way, the surviving partner can live in the property until they die or move, and the ultimate beneficiaries of this share of the property will be their children.
This appears to be very straightforward and sensible, but problems occur when trying to combine Equity Release with Estate & Tax Planning solutions.
Unless any Trust created has been expertly crafted to take into account the Equity Release product in the right way, any outstanding loan repayment may only come from the share of the last surviving partner – causing extreme family friction after death due to the financial imbalance created between the families.
So whilst Equity Release can form part of your wider Estate & Inheritance Tax Planning, we always recommend you consider the need for Equity Release first, before moving on to your Estate and Inheritance Tax Planning, so these two areas can work together more harmoniously. However, DanJo & Co - The Will writing company is on hand to help and advise with these types of scenarios.
There are a number of possible costs involved in taking out equity release:
• Set-up fees
• Legal fees
• Valuation fees
• Advice fee on completion.
With a lifetime mortgage, you can add some of these fees to your loan to avoid too many upfront costs.
The initial advice you receive is free. So you'll be able to discover the facts about releasing equity from your home free of charge without having to pay an advice fee, whether or not you decide to go ahead.
(Equity Release will reduce the value of your estate and may affect your entitlement to means-tested benefits and tax status)
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY DEBT SECURED ON IT.
DanJo & Co Financial Ltd do not offer mortgage advice. DanJo & Co Financial Ltd are introducers to John Charcol.
Mortgage advice is provided by John Charcol, which is a trading name of John Charcol Limited and its Appointed Representatives. John Charcol Limited is authorised and regulated by the Financial Conduct Authority under Financial Services Register number 665649.
We are not authorised to provide advice for Will writing or conveyancing these will be referred to a qualified 3rd party.