Equity Release
If you’re asset-rich but cash-poor and don’t want to move, equity release schemes can be an option to unlock the value of your home without selling it. This can be particularly useful if you’re worried about inheritance tax, as it can help reduce or eliminate the potential liability while also providing a gift to your family. Check out our Estate Planning section for more details.
There are two main types of equity release schemes: lifetime mortgage, which lets you borrow against your home, and home reversion, where you sell a share of your property.
Lifetime Mortgages
Equity release lets you access the value of your home while you still live there. The most common type is a lifetime mortgage, which is a loan secured against your property. These loans are typically available to homeowners aged 55 or over, and you can receive the money as a lump sum, series of lump sums, or regular income. Generally, you don’t have to make any payments towards the loan until you die or move into long-term care, but paying the interest can prevent the loan balance from growing over time.
Many UK residents use equity release to supplement their retirement income and achieve their financial goals. We can help you explore this option too.
Equity release enables you to remain the owner of your home while accessing its value, provided you continue living in and maintaining the property. You can use the money released for any purpose, as long as you’ve cleared any existing mortgage on the property. However, it’s important to note that taking out a lifetime mortgage may affect your eligibility for means-tested benefits and tax position, which we will explain to you transparently.
If interest is added to the loan, your property may not have any value left when the loan is repaid, typically from the proceeds of selling the home after you die or move into long-term care. Additionally, taking out a lifetime mortgage may limit your options for selling or moving home. However, a “no negative equity guarantee” option is available, ensuring that you will never repay more than the value of your home when it’s sold, even if the outstanding loan amount is greater (subject to terms and conditions).
Home Reversion
Home reversion plans involve selling all or a portion of your home, and in return, you continue to live there as a tenant for the rest of your life. You may not fully own your home anymore, but you can live in it rent-free, or pay a nominal rent, such as £1 per month.
If you purchase a home reversion scheme jointly, both partners have the right to live in the house for the rest of their lives, even if one partner passes away. You can choose to receive a cash lump sum, a monthly annuity income, or both.
It’s important to note that the percentage of the property’s market value that you receive in exchange for selling all or a portion of it is determined by your age, with older individuals receiving a higher percentage. When the property is sold after your death, the investment company receives a share of the proceeds proportional to the amount of the property you sold to them.
If you sell the entirety of your property, the investment company will receive all of the proceeds from the sale. Alternatively, if you sell a percentage of your home, such as 75%, the investment company will receive 75% of the sale proceeds.
It’s important to keep in mind that if you sell the full value of your home and its value increases in the future, the investment company will be the sole beneficiary of the increase. However, if you retain a portion of your home, your estate will benefit from any increase in its value.
When considering equity release schemes, it’s worth exploring those that offer a “no negative equity guarantee.” This guarantees that if the property does not meet the full value of the equity release scheme, the investment company will receive only the full market value of the house. Any excess above the property’s value will be written off under these schemes that provide a no negative equity guarantee.
Before you think about equity release, you should also consider your other options:
- Savings and assets that could help fund your retirement
- Consideration of a conventional mortgage as an alternative
- Sell up and trade down
- Sell up and live with children or other relatives
- Sell up and hope that the local authority can provide housing
- Selling and renting
- Take in tenants (not an ideal option for many elderly people)
- Local authority or other grants
It’s important to consider that equity release schemes may be more costly in the long run compared to downsizing to a smaller property. If you’re unsure about which option is right for you, we can provide guidance and support to help you make an informed decision. Our team takes the time to understand your specific needs and goals, and we offer clear explanations of each equity release option available to you, including any potential drawbacks. Don’t hesitate to contact us to speak with one of our specialists. We’re here to help.