How Equity Release Works
There are two main types of equity release plans: lifetime mortgages and home reversion plans.
1. Lifetime mortgages allow you to take out a loan on your property in return for a tax-free lump sum, an income or a combination of the two. Much like a standard mortgage, the loan is secured against your property and you continue to own your own home.
The amount you can release depends on a combination of your age, health and the value of your property.
There are several ways a lifetime mortgage can work:
Roll-up – where the interest is not paid back on a monthly basis to the lender but rolls up over time. The loan and the rolled-up interest are repaid either when your home is sold, on your death, or if you move into long-term care. There are no repayments to make during the life of the loan and both members of a couple are covered, so if one goes into long term care before the other, the other party can remain in the house until they either die or move into long term care themselves.
You generally have the choice of receiving either a cash lump sum or money in smaller amounts as and when you want this is called a Flexible Drawdown. Your choice of product will determine how quickly the interest grows on the loan. Taking a Drawdown product may reduce the total interest cost over time and prove more cost effective than taking out a large lump sum at the start.
Interest-only – where you pay monthly interest on the loan and the loan sum is repaid when the house is sold, on your death or if you move into long-term care. In some cases it is possible to pay monthly interest only on a loan and then roll this up when it is no longer affordable to make monthly payments.
Home reversions involve you selling all or part of your home to a company in return for a lump sum or regular income and the right to remain living there.
When you die or move into long-term care, the provider will be entitled to its share of the property’s value at the prevailing market rate. The balance of the property that you didn’t sell goes to your estate.
The amount you can raise from a home reversion scheme depends on your age and the age of your partner but it tends to be between 35% and 60% of the market value of the property.
Not currently regulated, sale and rentback schemes are another way of generating equity from your property. Sale and Rent back or Sale and Leaseback as it is sometimes known, entails you selling your home, usually at a significantly reduced value, and then renting this same home back which means you become the tenant. You would normally have an assured short hold tenancy agreement, which may be for 6 or 12 months. Customers who use these schemes are usually looking for a quick sale and often receive much less for their property than the market value. Usually, customers sign an assured shorthold tenancy agreement that enables them to live in the property in return for a monthly rent, which may be increased in the future.
The provision of sale and rentback or leaseback schemes are not regulated by the Financial Services Authority and do not fall under SHIP. These schemes can be sold by anyone without the need for specific qualifications so you cannot be certain that you are receiving the best advice available. There is also no security should the company go into receivership meaning you could end up being evicted from your home. Whilst on the face of it these schemes may look attractive it is important to fully understand the risks. Please see our list of do’s and don’ts if you are considering a sale and rentback scheme.
Sale and Rentback schemes are very different to regulated equity releaes offered by SHIP members, namely because you have no security of tenure and can be evicted from your home, even after selling at a reduced rate.
It is also possible to sell your property and rent it back on a lifetime lease. This option will give you more security of tenure, but you must be able to keep up your monthly rental payments. Lifetime leases are regulated by the FSA but do not come under SHIP.
To understand the features and risks of equity release plan ask for a personalised illustration from your adviser. Taking out a lifetime mortgage could affect your tax position, your eligibility for means-tested benefits and ability to move or sell your property. An equity release plan will reduce any inheritance that you decide to leave. You should talk to your financial adviser about these risks if you are at all unsure.