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Is Equity Release for You?

How Equity Release Schemes Work

Equity release schemes can offer lump sums and/or regular income.  There are a range of different types of equity release schemes.  Most schemes work on the same basic principle, they lend you money against the value of your home, in exchange for a share of the proceeds from the sale of your home when you (or for joint schemes, when the last person) die or move into long term care.

There are a number of advantages and indeed drawbacks with equity release, which you should consider before committing to such a scheme.

How much can I get from an Equity Release Scheme?

Lump sums can range from £5,000 up to £500,000, or even more.  The actual amount will depend on a number of factors such as age, house value etc.  The best way to receive a quick quote of how much you could release, use an online equity release calculator.

The full amount released is available to you tax-free, however, you may be required to repay any outstanding mortgages or loans secured against the property.

Typically, uk equity release schemes can take up to 10 weeks to complete.  Home Reversion Schemes can take slightly longer, but are usually completed within 12 to 14 weeks.

Depending on the scheme you are considering, you may be able to raise further finance in the future when required.  Flexible Lifetime Mortgages allow you to agree a borrowing amount, but then only take a proportion of this initially, leaving you to drawdown further lump sums as required in future.  With home reversion plans, you can sell a share of ownership of your home initially, and then sell the remainder for a further lump sum later on.

General Criteria to Qualify for Most UK Equity Release Schemes

You, or in joint cases, the youngest person must:

If you still have a small mortgage on your property, you may still be eligible for some uk equity release schemes.

General Advantages of Equity Release Schemes

Tax Implications/Advantages of UK Equity Release Schemes

Any lump sums/income received from equity release schemes is not subject to tax in the UK.  However, income arising from the investment of lump sums/income will be subject to UK income tax.

Inheritance tax is payable on estates with a value exceeding £325,000 (2009/10), which includes the value of your home.  By releasing equity before death, you can reduce the value of your death estate, and thus reduce the inheritance tax bill left to your inheritees.  However, if you intend to gift any lump sum received from an equity release scheme to anyone, you may still incur inheritance tax charges.  An IFA can provide more details on these implications.

Drawbacks of Equity Release Schemes

Ultimately, all equity release schemes will reduce the what your family will inherit when you die.  It is important that you consult your family prior to entering into any equity release scheme.

Always keep in mind that companies offering these schemes are innit to make a profit, which ultimately will be paid by you and/or your family.

If you receive means-tested state benefits, these could be lost or reduced if you enter into an equity release scheme.  Such benefits may include dental treatment or free glasses.

Below, we discuss possible alternatives to equity release schemes.

What are the Costs of Equity Release Schemes?

Interest rates offered on mortgage-based equity release schemes are significantly higher than ordinary mortgages.  You will therefore be paying higher interest costs by partaking in such schemes.

Most schemes involve various valuation fees, legal fees etc.  These costs may be borne by you, although they may be refunded if you go ahead with the scheme.

You will remain responsible for maintaining and repairing your home.  You will be required to keep your property in a reasonable condition, particularly if you enter a home reversion scheme.  This is required to protect the lender’s investment.

How to Protect Yourself

A body exists for the purpose of promoting safe equity release schemes called SHIP (Safe Home Income Plans).  Companies which are members of this body offer a number of guarantees such as:

Look for companies displaying the SHIP logo.

Types of Equity Release Schemes

There are 4 main types of equity release schemes:

Details of each equity release scheme can be found using the above links.

Alternatives to Equity Release

Since equity release schemes will reduce the inheritance of your family, as a family, you may find it more beneficial for your next of kin to help you out financially, in exchange for inheriting the full value of your home when you die, rather than a reduced amount.

You may have other assets/investments which can be used to provide an immediate cash lump sum and/or regular future income.

You may be able to release equity from your home by moving to a less valuable property.  This strategy may be more appropriate if you live in a larger property but no longer need the space if your children have moved out.

Other Considerations

You may wish to move or sell your home in the future.  Either to downsize to a smaller home, move closer to family, or even move into a care home.  You should check whether any plan you are considering allows this.  An IFA can help with this.

What can an Independent Financial Advisor (IFA) do for you?

The Financial Services Authority (FSA), the UK’s chief financial watchdog, recommends getting independent financial advice before proceeding with any equity release schemes.

An IFA can:

Equity Release