Equity Release

It is a way of unlocking the value of your property, without having to move home. Money is paid out as a lump sum in cash or a regular income. There are no stipulations on how to spend this money.

Equity Release is an umbrella term that is used to describe the two main form of loans which are known as -

1/ Lifetime Mortgages
2/ Home Reversion Plans

How does it work?

 1. Take out a specialist mortgage
In the Equity Release world these are called Lifetime Mortgages and the main features are:
You borrow money which is secured against the value of your home.
The money is paid out via a cash lump sum, or a regular income, or a combination of the two
You continue to own and live in your home until you die, or your spouse dies, whoever lives the longer
Interest is charged but this is added to the value of the loan so that the amount of the original loan will therefore rise over time
The loan and the interest charges are repaid when you die

The main downside as pointed out above is that as nobody knows when they will die there is also no way of knowing how large the loan will become.
As interest is charged on interest, so-called compounding, a loan taken out today for £50,000 will roughly double every 10 years. Live a long time therefore and the amount to be repaid on your death could be extremely large leaving little or no value on the property to pass on. But most Lifetime mortgages come with a no negative equity guarantee which pledges that you can never owe more than the sale value of your home, no matter how long you live.

2. Sell your home (or part of it) but continue to live in it.
This style of Equity Release is called a Home Reversion Scheme and it works like this:
You sell your property, or a percentage of it, to a reversion company
You are allowed to live there until you die, or your spouse dies, whoever lives the longer
No interest is charged on the loan
When you die the property is sold and Reversion company takes it’s profit

For example, if you sold 40% of your home and it was sold for £100,000 your estate would receive £60,000 and the Reversion firm the balance of £40,000
However, you won’t receive the full market price for your property when you sell it, or part of it.
For example, if you sell 50% of your house to a Reversion company, depending on your age, it will only pay in the region of 25% – 50% of the value.

But why do Reversion companies only pay a percentage of the value? Because you get to carry on living in your property until you or your spouse dies and therefore the company may have to wait years for its return.

The main advantage to this type of loan is that you know exactly what proportion of the house can be left to your beneficiaries. For example, if you sell 30% of your house, when you or your spouse dies there will be a guaranteed 70% to pass on.

The main disadvantage is cost. Recent research found that in almost all cases Home Reversion plans were normally the most expensive Equity Release option.

Who qualifies for Equity Release?
Anyone over 55 for a Lifetime mortgage But you usually have to be 65+ to get a Home Reversion plan
A property owner with no mortgage, or just a small one
People who need a minimum of £15,000 – £25,000 – Equity Release is a complex tool and it is unprofitable for companies to get involved in small amounts of money.

Who owns my home?
Lifetime Mortgages - You do, although it will have a mortgage attached.
Home Reversion - The Reversion Company owns the percentage your originally sold them, perhaps 50% and you own the balance.

How is the money paid?
Not all Equity Release schemes pay money in the same fashion. Expect one or more of the following:
Receive a cash lump sum (or the ability to drawdown money when needed)
Receive an income for life, or Both a lump sum and an income for life
If you opt to receive an income this will normally be paid via an Annuity. How much you’ll receive depends on a number of factors, including:
Your age
Whether you’re a man or women, and
The state of your health 

Regulation in the Equity Release Market?
All Equity Release schemes are regulated by the UK’s financial regulator the Financial Services Authority (FSA). An added safety factor is you can only be advised on these deals by advisers who have taken and passed specialist Equity Release exams
FSA regulation means that to sell these financial products companies have to obey and follow certain rules and guidelines. These are there to protect the buyers.
If something does go wrong the first people to contact are both the adviser and the lender as they have set rules in place to deal with complaints
If the problem persists then you always have the right to make a formal complaint to the Financial Ombudsman

Concerns remain over:
Charges
Generally high interest rates
Potential inflexibility
And in the case of Lifetime mortgages how much of your property’s value can be left to your children or relatives

Therefore the consensus is that Equity Release should be viewed only as a last resort.

If you want to release equity within your property downsizing for most will be the best and cheapest financial option. The trouble with this is that many older folk are attached to their property and don’t want to move. Sadly, not everyone can afford to have it both ways – continue living in the same property and access cash in the bank.

Equity Release – Lifetime Mortgages.

What are Lifetime Mortgages?

The 4 different styles of Lifetime mortgages are
1/ Roll Up mortgages
2/ Drawdown mortgages
3/ Home Income Plans
4/ Interest only mortgages

Lifetime Mortgages (sometimes called Roll Up Mortgages) alongside Drawdown Mortgages (both come under the umbrella term of Lifetime Mortgages) are the most popular form of Equity Release.

A Lifetime Mortgage works like this:
A lender offers a cash lump sum, or a monthly income, or a combination of the two which is based on the value of a property
Interest is charged on the loan but the customer does not pay it Instead, the interest is added or ‘rolled up’ on the original loanInterest is therefore compounded over the years (interest is charged on interest etc)
On the sale of the property the loan and the compounded interest is repaid
It is critical to note that because compounding of the interest takes place there is a risk that should the loan last a long period of time it could grow larger than the value of the property.

But most Lifetime Mortgages are sold with a no negative equity guarantee. This means that if the loan is greater than the property’s value it’s a problem for the original lender and not the homeowner.
You can therefore never be forced to sell or move out of your home provided this guarantee is in place.

How much can be borrowed?
This will depend from lender to lender but the following is a good rule of thumb:
A 60 year old will be able to borrow around 25% of a property’s value
And this will rise by 1% every year
So a 70 year old should be able to borrow 35% of the property’s value and 40% when 75.

Lifetime Mortgage promoters also normally require a minimum loan of £20,000 but again this differs from firm to firm.

An example of a Lifetime Mortgage
John takes out a Lifetime mortgage for £45,000 with a fixed interest rate of 7%
John passes away 10 years later and his property is sold
The lender gets back his original loan value, £45,000 plus the rolled up interest of £43,522 making for a total of £88,522
Any value in the property above £88,522 when it’s sold is left to John’s beneficiaries

Important – How compound interest grows over time
Compound interest is an important point to understand when it comes to Lifetime mortgages.
Compounding means that interest is charged on interest and therefore over time even a small loan can grow to a large one
It isn’t so much of a problem in the early stages of a loan, under 5 years. But it starts to take effect after about 10 years. See the following example:
A lifetime mortgage of £39,000 is taken out when you are 65 at a fixed rate of 6.95%
In 10 years the original loan plus interest will have grown to around £80,000
When you reach 80 the debt will be around £112,000
In just 15 years the accrued interest bill will be around £73,000
House price growth should also be taken into account

Taken out of context the figures above don’t look that good:
An initial loan of £39,000 seems to get out of control over 10 years, and in 15 years it stands around £112,000
But when you combine the loan value after 10 or 15 years with natural house price inflation the figures start to take on a different dimension. Yes, property has been hit over the last few years but the values are still sharply higher over 10 or 15 years).

Look for example how much equity would still be available to leave to any heirs after 10 years with 3% house price inflation –
A property is worth £130,000 today
A Lifetime mortgage is taken out and releases £39,000 with a fixed rate of 6.95%
After 10 years the £39,000 has grown to £78,978 but the property has also risen in value to stand at £174,709
If the mortgage were to be paid back and the property sold there would still be £95,731 left in remaining equity which belongs to either the owner or his beneficiaries

Take note of this point because it’s important. So many Lifetime mortgage commentators seem to miss this, ie they don’t consider that over a period of time the property will also probably have risen significantly.

So if you look at just the loan value the figures look dreadful. But take into account house price inflation and they start to make a lot more sense.

How old do I have to be to qualify?
Lifetime mortgages are widely available from age 60. A few companies will offer them to those aged 55, while others won’t do business with anyone under 65.

 Fixed or variable Interest Rate
Most Roll Up mortgages come with either a fixed rate of interest or a floating capped rate. Interest rates obviously move over time and if they move lower that’s obviously good news for borrowers. But good news is never a concern when it comes to money and budgeting.
What would happen if the lifetime mortgage was on a floating rate (tracking official interest rates) which then started to rise, and rise dramatically? In this situation the loan and accrued interest could easily get completely out of control.

Having a fixed interest rate solves problems that result from sharply higher interest rates. Yes, a fixed rate also means you cannot take advantage of falling interest rates, but it does mean that you know exactly how interest will build up over the years. And this is important because you’re protecting any potential downside.

Capped interest rate deals
A capped interest rate deal tries to offer the best of both worlds. This benefits from falling interest rates but is unaffected should they rise sharply.
For example, the interest rate might be capped at 7%. This means that if official interest rates, those set by the Bank of England, move to 8% or higher the interest rate on your loan won’t rise above the 7% cap. But as interest rates fall the rate charged on the mortgage should fall as well.

Lifetime mortgages and negative equity
With a Roll-up mortgage it is theoretically possible, especially if you live a long time, for the initial loan to grow to be more than the value of your home. This is so-called negative equity.
As there is no standard type of Lifetime mortgage the different lenders have different policies to the negative equity effect. A small minority may ask you to start paying the interest on the loan while others may charge your beneficiaries the extra interest after your death.
Clearly critical questions must be asked and understood before any policy is signed.
Look for SHIP branded Equity Release Deals
There is an easy way to protect yourself from the effects of negative equity.
Most equity release providers sign up to the voluntary code of practice known as SHIP, or Safe Home Income Plans. And the dominant guideline in SHIP policies is a

No Negative Equity Guarantee.
The guarantee means that both you and your beneficiaries will never have to pay more than the value of your home should it fall through the negative-equity trapdoor. For example –Say a Lifetime Mortgage Roll Up was taken out a long time ago and stood at £150,000
But the value of the property was only £140,000, resulting in £10,000 of negative equity
If the person was still alive and living in the home there would be nothing the equity release provider could do, ie no eviction
However, when the person dies the £10,000 loss would be met by the lender and not by any surviving relatives

The SHIP code of practice is not only excellent news but it sets today’s Equity Release schemes apart from the plans originating in the early 1990s. Deals signed then created controversy because of some horrendous negative equity problems. But those days are thankfully long gone. 

Advantages – Roll Up Mortgages
No negative equity guarantee – This means that if the loan ever exceeds the value of your property you are still legally entitled to live there
Only pay for the time you hold the mortgage – If you were to die six months after taking the loan you would only pay interest for that period of time
More flexible than home reversion plans – particularly from those looking to borrow smaller sums of money.
More providers = cheaper rates – Lifetime mortgages are by far the most popular type of equity release so there are more providers in the market which creates competition which in turn normally leads to lower interest rates and other assorted charges
Portable – most are portable if you want to move home and this adds some overall flexibility
Available to those as young as 55 – Whereas Home reversion schemes are normally only available to people over the age of 65, Lifetime mortgages can be obtained when 55+
Regulated by the FSA – Always good to have a financial product regulated and monitored by the financial regulator, the Financial Service Authority (FSA)

Disadvantages – Roll Up Mortgages
Compound interest – Interest is charged on interest and so on. Work on the assumption the initial debt will double after 10 years and then double again after another 10. Take out a lifetime loan for £50k when 60 years old and at 80 it will have mushroomed to £200k
Interest rates can be high – Because these are specialist type mortgages the interest rates can often be high in relation to more traditional style mortgages
Might not be any value in the property when you pass away – Because of compound interest the loan value could exceed the value of the property when you pass away. Nothing will therefore be available to leave to your beneficiaries
Your State benefits might be affected – money received to equity release could seriously alter the amount of benefits or state support you’re able to collect. It is critical to research this matter further
Might increase your tax – Although the original cash is paid out tax-free if you use this money to generate an income further tax might have to be paid
Hefty early repayment penalties – Sign up but want to cancel the deal later and you could find there are expensive early repayment penalties
Might not be able to release more equity – depending on how much the initial deal is signed for it might not be possible to release more equity in later years

Roll up mortgages are far from perfect financial products.
Their main negative is that as we never know how long we will live it is impossible to know how large the loan might grow. This is due to the nature of compound interest where interest is charged on interest and so on.
So Equity release plans, including Lifestyle mortgages, should be viewed as a massive financial decision which can have long ranging effects. Notably, unless you take great care of the amount of money that has been released, it is possible that you could end up in extreme poverty in later life.
Sadly this has happened to many people in the past who’ve fallen for the slick and glossy lifestyle marketing where luxury cruises and new cars are often promoted as areas to splash out on.
But you can rise above that nonsense if you use common sense which includes:
1. Spend as much time as possible on researching what you’re buying and looking carefully at both the charges involved and also the small print~
2. Think long and hard about the most prudent way to use any money released and work on the assumption that you will live for many year
3. Seriously consider all other financial options including downsizing your property

Equity Release – Home Reversion Schemes.

What are Home Reversion Schemes?
A Home Reversion plan is where you sell your home or a percentage of it to a Reversion company but retain the rights to live in it rent-free for the rest of your life.The money received can either be paid out in a cash lump sum, a monthly income, or a combination of the two.
The reversion company is unable to sell the property until both you and your spouse are dead or you decide to move into long term care. This means that you will not receive the full market value for your property as the Reversion company might have to wait 10, 20 or even 30 years before they can sell the property and make a profit.
The payouts range between about 20% – 60% of a property’s value and depend on many factors, the main one being the age of you and your partner
The older you are the more of a percentage you’ll receive and vice versa
This is common sense as collectively 65 year olds have a longer life expectancy than those aged 80.
The minimum qualifying age for Home Reversions are therefore higher than for Lifetime Mortgages.

How do they work?
Under a Home Reversion scheme you sell the legal ownership to a Reversion company and become a tenant.
This is not a cause for concern because an iron clad legal document is signed, called a Lifetime Lease. This gives you the right to continue living in your property until you or your spouse dies (whoever lives the longest), or you have to move into long term care.
However, even though you are only the tenant you will still be responsible for upkeep of the property and all associated bills and outgoings relating to it.

How much can I expect to receive from my property?
This depends mainly on your age and the age of your spouse if married.
The range is between about 20% and 60%. That means if your property is worth £100,000 and you sell 100% of it to a reversion company you’ll receive between £30,000 – £60,000.
As pointed out in the introduction this is because the reversion company cannot sell the property while you still live there. It may then be many years before the company can turn a profit.
In effect a reversion company is paying a discounted price for an asset which it can only sell at some stage in the future.

Health is an important factor?
The state of your health is an important factor when thinking about a home reversion scheme and so needs to be considered carefully.
For example, experts believe that about 40% of people who opt for home reversion could benefit via receiving a higher percentage on their property because of their medical conditio(s). For example -A 68 year old male who has had one heart attack and suffers from a nonlife threatening kidney disease might be offered a lump sum of £180,000 on a property worth £300,000. That is 60% based on the assumption that 100% of the house has been sold to the reversion company
But if his medical conditions were certified the lump sum could be boosted by 10% or more
When it comes to Home Reversion schemes both old age and poor health are a benefit as more cash can be raised.

You don’t need to sell all your property.
Many people use Home Reversion schemes to release only part of the property’s value. For example, you can elect to sell 20%, 30%, 50% or the full 100%.
Selling 100% will obviously pay the most money but on your death there will be nothing left of the property’s value to pass on to any beneficiaries.
But if you sell 25% and retain 75% ownership, this can be passed on to whoever you wish. Also, by selling only 25% you have the option to sell more of your property in the future.
This makes sense because as you get older the percentage you get paid of the current property’s value will increase. For example, if you’re presently 70 you’ll probably receive around 40% of the market value. But if 75 this might increase to 45%.

A Home Reversion Example.
John’s property is worth £100,000 -He takes out a Home reversion plan and sells 50% to a reversion company
The company pays him £20,000 which is 40% of the value (of half the share, remember he only sold 50% of the property)
John dies 12 years later and the property is sold for £150,000
The proceeds are split, the reversion company gets its 50% share of £75,000 and John’s heirs get the balance, also £75,000
As you can see the Reversion company’s gross profit would be £55,000 (£75,000 – £20,000).
If you do the maths that’s about a 9% annualised yield which is not bad at all. But obviously the reversion company has costs to pay as well.

There is no interest charged
interest is not charged with reversion schemes because they are neither loans or mortgages.

Remember, the reversion company is buying part or all of a property for a discounted value based mainly on life expectancy.
In effect you’re swapping an asset – your property – for a cash lump sum.

There is no standard Home Reversion Scheme.
There is no standard Reversion Scheme and so policies differ from provider to provider. As finance gets more advanced companies are continually offering new ideas and variations.
Competition has also increased over the last 5 years which is always good news for consumers as it normally leads to better prices.
It’s therefore important to research what is available, checking out as many providers as you can. As ever, special attention should be placed on the total costs and charges along with the small print.
Never forget that with personal finance products it is these details which can considerably influence the total cost.

Examples of different Home Reversion plans –
Some lenders won’t pay a cash lump sum Instead the money is used to buy an Annuity which in turn pays a monthly income for life Others may give you the choice of having a lump sum and an income
Some companies won’t allow you to sell 100% of your property, their limit might be 80%

Advantages – Home Reversion Plans
No monthly payments to make – You won’t have to pay a single penny of repayments
No interest to pay – A home reversion plan is not a loan, so there is no interest to pay. Other Equity Release plans such as Lifetime mortgages not only charge interest but this is compounded. This means that as interest is charged on interest the amount can grow extremely large over the years and in extreme cases can be more than the value of the property
You control what portion of the property is left to your beneficiaries – If you sell 50% of your property to a reversion company, you know that you retain control of the remaining 50% and can leave this to any beneficiary. However, if you take out a Lifetime mortgage any final percentage will not be known until you die
Benefit from an increase in property values – If the property market rises you get to share in this – unless you have sold its entire value
More cash can be released than with a Lifetime mortgage – Generally speaking more cash can be released with a reversion scheme than with lifetime mortgages
Can increase the percentage sold – For example if you initially sold 15% of your house you could sell another 10% or more at a later stage to generate extra cash
Bad health is an advantage – On one hand being in good health is an obvious advantage but for reversion schemes if your medical conditions are both serious and can be certified the Reversion company will probably pay you more, ie it will release say 40% of the property’s value instead of 35%
Regulated by the FSA – Always good to have a financial product regulated and monitored by the financial regulator, the Financial Service Authority (FSA)

Disadvantages – Home Reversion Plans
The most expensive option – according to research done by the financial services consumer panel, which advises the FSA, home reversion plans were found to be the most expensive option in almost all circumstances. To quote from their research – ‘in most cases the odds clearly favoured selling up and downsizing although in some cases a lifetime mortgage did work out to be better value’
Won’t receive full value for your home – The reversion company will only pay around 20% – 60% for the value of your property
Can’t move home – Home reversions are not portable so if you want to move houses at a later stage your property must be sold and the reversion company will take its money. Lifetime mortgages however are generally portable
Early death – if you were to die soon after taking out a plan you have effectively sold a share or the full amount in your house on the cheap. However, some home reversion schemes give families a rebate should you die within the first few years of signing up
Your State benefits might be affected – Cash received from a Reversion scheme could seriously alter the amount of benefits or state support you’re able to collect. It is critical to research this matter further with an adviser might increase the income tax you pay – Although the original cash is paid out taxfree if you use this money to generate an income further tax might have to be paid
Restrictions on your home – With some Reversion plans you will have to tell the company if your circumstances change. Perhaps you let a friend or lodger live with you. They might be forced to sign a document to waive their rights to live there should you die. Also, you might not be allowed to leave the property empty for more than 6 months
General upkeep expenses – You will be liable for general upkeep of the property. If this is not done to a satisfactory standard the reversion company might carry out the work and invoice you. Think hard about this if your property is old and is likely to require ongoing maintenance
Moving into long term care can cancel the contract – With some schemes if you have to move into long term care the contract is terminated and the house will be sold
Have to be over 65 – in most cases home reversion plans are available only to those aged 65
Poor value for ‘younger’ pensioners – because of their increased life expectancy. For example a 65 year old might only receive 30% of the value of their property but in they were mid 70s this might rise to 45% or more
Selected properties only – the home reversion provider will prefer properties that are both in good condition and easy to sell. If your property is neither it might be hard to strike a deal
You become a tenant in your home – When you sign up you have to transfer legal ownership to the Reversion company although you are granted a lifetime lease which enables you to continue living there until you or your spouse dies, whoever lives the longer.

Home Reversion plans are normally best suited to:
People over the age of 65 (and preferably higher)
With no dependents or desire to leave their estate to anyone
Anyone who’s looking to release the maximum amount of cash

Home reversion plans can also be used by people that want to leave a guaranteed inheritance.
If you sell 50% of your property you can leave 50% to whoever you wish.

But are Reversion Plans any good
We know that they’re generally expensive and often inflexible, so it is logical to suggest that at best this is an OK product.
Equity Release, including Home reversion plans, should therefore be considered as a last resort for most home owners. Yes, they can play a role but downsizing your property looks to be a much better alternative.

Finally two important points to consider:
1. The more research you do into home reversions, including paying special attention to how fees are charged, the better deal you will get.
More importantly, there is less chance of signing up to the wrong type of plan for your needs

2. Think hard about how you’re going to use the money. If you spend it on holidays, cars, and other frivolous expenses and you live a long time – will there be any money left in your later years?

Equity Release & Tax
Any cash lump sum produced from releasing equity is free of both Capital Gains tax (CGT) and income tax.However, if the lump sum is then used to provide an income, perhaps you place it on deposit or buy an annuity, that income might be subject to income tax. This will depend on the amount of the income and whether you have any other income to consider.

Equity Release alternatives.
Equity Release plans, including Home Reversions and Lifetime Mortgages, are far from perfect financial products. They can be both expensive and inflexible and so for many people they should be considered only as a last resort.

So what are the other options available to the older generation to release built up wealth in their properties?

Downsize your property.
The main alternative to Equity Release is to downsize your property, ie move from a £200k house to a £100k flat. The advantage to this strategy is that no money has to be borrowed and therefore no interest can build up in the future.
Take moving costs into account though. These will include fees for estate agents, solicitors, stamp duty fees, removal company etc. They can add up and for a medium priced property can easily top £10,000.

Borrow from family members.
Instead of selling all or part of your property to an equity release firm or taking out a Lifetime mortgage perhaps some family members can buy the property (or part of it) and then you sign a long term lease to continue living there.
However, this is not as easy as it sounds and can lead to potential problems in the future. For example -
If your son were to buy the property and is then declared bankrupt you could be evicted as you’re just a tenant
Or if his marriage were to break down the house could be disputed in any divorce hearings
Complex tax situations might also arise, especially if the property was sold for a  rate. In such a circumstance the taxman, as well as the relevant local authority, could take the view that the parents have effectively given a proportion of their property away, and this would be considered part of the taxable estate at death.
If you want to explore this route it’s critical that you take good legal and tax advice.

Use your savings and any investments first.
If you have any built up savings or investments consider using these before any Equity Release deal is signed. Remember, your property will always be there so there’s no need to release equity from it if you have other forms of cash available.
If you have any investments it might be a good idea to seek professional advice before you do anything. Some investments are tax-free such as ISAs or maybe you’ve got money semilocked up in specialised financial products.
In both of those cases selling or accessing the money without proper planning might mean you’re leaving cash on the table.

Sell and rent.
This is an interesting alternative to equity release but should only be considered by those owning a property worth in excess of £400,000. The basic principle is this -
You sell the house yourself, ie not to an equity release company
The money is then invested into safe income producing investments (bonds and the like, not stocks which can lose significant value)
The income you receive should be sufficient to allow you to rent a property and also to fund your monthly living expenses.

The main advantages are that you can move to wherever you want, and also there are no maintenance or breakdown costs as these will be met by the landlord.
The main disadvantage is that there will possibly not be sufficient money available for living expenses after you have paid the rental. This is the reason why this alternative to Equity Release should really only be carried out if your property is worth more than £400k.

If your monthly income from the sale proceeds is not much more than the monthly rent you will have to dip into your savings every month. This might not be a problem if you die within a short period of time but if you or your partner live for a considerable amount of time the funds might sink considerably. Still, for some people it is a genuine alternative to a traditional equity release deal and something that should be considered.

You migh be eligible for local grants to improve your property.
If you don’t need a lot of money but at the same time need cash to repair your property consider applying for a local or government grant. These are often available for the older generation as part of the local council budget.

Consider Remortgaging.
Remortgages are often overlooked by those considering freeing up cash from their property.
Not all mortgage providers will deal with retired people but some do.
However, you will normally need to prove some sort of income to make the monthly repayments. The advantage to remortgaging is that both the interest rate is usually lower than an Equity Release deal and you’re offered far more flexibility. So if you want to cancel the mortgage or refinance it in 2-3 years the repayment penalties are usually reasonable.
Often the best mortgage to use would be an interest only one. This means the monthly repayment only covers the interest and not the principal.

Check your benefits entitlements.
Maybe you don’t need that much extra money for living expenses and therefore Equity Release might seem rather drastic.
If so check you’re receiving all the State and local benefits you’re entitled to. A good way to do this is to make an appointment with the Citizens Advice Bureau. Plus don’t forget the Taxman offers free advice

Rent a Room.
If your property is large enough consider renting a room out to a lodger.
The taxman has a ‘rent a room’ scheme and you can receive up to £4,250 per year tax-free.

Summary
We often want the best of both worlds – to continue living in our present homes while having some more cash in our pocket.Sadly for many people this isn’t possible so hard choices have to be made.
If I had to make such a choice I would probably downsize my property and then use the excess cash to create an income.
My reasons for doing this wouldn’t just be related to the fact that Equity Release can often be both expensive and inflexible. Rather, we often spend our whole life borrowing money and so are in debt, regardless of whether it is from loans, credit cards or of course a mortgage.
So heading into late life I think it’s a prudent decision to try to do everything possible to reduce or limit our personal debt burden.

How old do I have to be to qualify for an Equity Release scheme?
The usual prerequisites to take out an equity release contract are:
Aged at least 55 for Lifetime mortgages and over 65 for Home Reversion schemes
Own your own property and/or have a small mortgage on it, plus
Be a UK resident

Can I move home with an Equity Release deal?
This depends on which style of plan you’ve signed up for.
Most lifetime mortgages can be transferred as long as the new property is acceptable to the lender. But if the new property is of a lower value than your present home the lender might require you to settle some of the mortgage.
Home reversion schemes are not usually allowed to be transferred but it does depend on the property.
If you were looking to move home and your lender agreed you must expect to pay further legal and other associated Equity Release costs because new paperwork and due diligence will have to be done.

Finally, most schemes will allow you to move without restriction but first you will have to cancel the equity release deal in full which potentially could cost a large amount of money.
Occasionally this might mean you would not have enough equity to buy another property.

I still have a mortgage on my property, can I take out an Equity Release plan?
Most Equity Release providers will still accept your business as long as it’s a relatively small mortgage, perhaps less than 20% of the total value of the property. However, most lenders will expect any money released to first pay off the existing mortgage in full.

How important is it to shop around for an Equity Release deal?
It is critical to shop around for an Equity Release plan as is shown by a mystery shopper exercise which was carried out by the charity Help the Aged.
Mystery shopping is where an organisation sends people out incognito to test the market to see what kind of service is being offered and promoted.
Help The Aged used a ’76-year old man’ to call 7 of the leading Home Reversion providers to talk about what they could offer
The man wanted to release £80,000 from a property valued at £280,000

A Home Reversion plan is where you sell your home or a percentage of it to a Reversion company but retain the rights to live in it rent-free for the rest of your life.The payouts range between about 20% – 60% of a property’s value and depend on many factors, the main one being the age of you and your partner. The older you are the more of a percentage you’ll receive and vice versa.
The difference in percentage between how much the each provider would pay for the property was staggering.
The worst value firm wanted to take 62% of the property in exchange for £80,000
The best deal offered was 48.5% of the property’s value
The difference between the two is an extremely significant £37,800

Are there any properties on which Equity cannot be released?
Unfortunately Equity Release deals cannot be taken out on all types ofproperties.

The exclusion list includes:
Currently no specialist providers lend in Northern Ireland and some do not lend in certain parts of Wales
Properties worth less than £40,000 would not be attractive to a finance company
Leasehold properties where less than 75 years of the lease remain, or when the property is part of a trust
Freehold flats may also be unsuitable. As might some former council houses and one bedroom properties
Properties which are in a bad state of affairs or cannot easily be sold (houses located on major highways for example)
Some companies will not lend on properties already owned under ‘Tenancy in Common’

What is a Fixed Repayment Lifetime Mortgage?
It is a loan taken out which in turn is secured against the value of your property.
A tax free cash lump sum is then paid.
However, instead of paying interest on the loan, as with most Lifetime mortgages, you agree with the lender to pay a higher sum when the property is sold.
This sum is also fixed, ie it cannot rise over time. When the property is sold the lender must repay the loan and the remainder is their profit.

Obviously if you live a long time this style of Equity Release deal will be more advantageous to you, and better for the lender if you die within a few years of signing the paperwork.
How much higher the higher sum will be depends on your age and life expectancy (if you have certified medical problems this should mean a lower price).

Who has to pay for repair costs with Home Reversion schemes?
The owner of the property is liable for 100% of the costs, even though the entire property has been sold to the reversion company which has the authority to carry them out on your behalf and then invoice you.
This is why it’s important to consider the type of property you live in. If it’s modern and well built then the chances are that maintenance costs will be negligible. But if it is of an older type requiring substantial repairs, you might struggle to pay the maintenance bills.

Is it possible to add the costs of an Equity Release deal to the total loan?
Yes, most providers will allow you to do this.
Take note that over the years the £1,000 could grow to be a relatively large  figure because of how compound interest works – interest is charged on interest etc.
So if possible it’s always better to pay the costs up front. However, some people might not always be in the position to do this.

How much does an Equity Release scheme cost?
The average Equity Release deal is not cheap. This means that for smaller sums of money, under £20,000 the costs can really eat into the cash paid out.
Here is a list of the common charges and fees. Note that they’re average fees and not all of them are applicable.

Administration fee : £150 – £300 (normally only charged if you decide not to go ahead with the deal)

Arrangement fees £500 – £1,000 (sometimes priced as a percentage ofthe total loan) 

Valuation fee : £200 – £500
Legal costs : £500 – £1,000
General advice : £500 – £1,000

Can I cancel an Equity Release deal?
ifetime mortgages can usually be cancelled at any time in the future but there may well be xpensive early repayment penalties especially the cancellation occurs within 5 years of signing up.
Most Home Reversions cannot easily be cancelled but even if they can expect the cancellation process to be expensive.

Who sells the property on my death?
If you took out a Lifetime mortgage or Interest Only mortgage then -
Your representatives must arrange the sale of the property and pay the loan and interest back to the lender.
Any remaining balance goes into your estate –
As interest is due until as the debt is repaid, it is important to obtain the best possible price for the property as quickly as possible
Specialist lenders do, however, hold the right to sell the property should it remain unsold after a prescribed period of time
This period varies between providers and can be from 6 – 18 months. Your estate will be responsible for all selling costs

If you took out a Home Reversion Plan
If you sell 100% of the ownership to a company, the provider will arrange the sale of the property on your death

- If you sell less than 100% of your property the finance company will still arrange the sale. Any balance left over is for the beneficiaries of your Will

- Regarding sale costs, some finance companies will split the costs with your beneficiaries in the same percentage proportion as when the Home Reversion plan was taken out. Other lenders will not and it will be written into the contract that the beneficiaries have to cover all costs.

What is the SHIP code of conduct and why is it important?
SHIP stands for Safe Home Income Plans and is good news for consumers looking into Equity Release.
It is a code of conduct launched in 1991 the main aim of which is to protect consumers when taking out an equity Release deal.
All participating companies are pledged to follow the SHIP Code of Practice. Members display the SHIP logo in their brochures and other printed material as a guarantee to their customers. 

SHIP Code of Practice

Companies subscribing to the SHIP Code of Practice undertake to provide a fair, simple and complete presentation of any home income plan they may offer you
You will be given full details of your own obligations, commitments and rights under the plan, including security of tenure on your home for you and your partner (if applying jointly) for the rest of your lives

You will be told what costs are involved, your tax position and the possible effect on your plan – of moving house and of changing house values, as well as the effect of the transaction on the value of your estate on death
Your own solicitors will act on your behalf and look after your interests at every stage
Before your SHIP scheme can be completed, they will be required to sign a certificate confirming the principal terms of the contract have been fully explained to you
A SHIP plan guarantees that you cannot lose your home – whatever happens to the stock market or to interest rates

Your home may be repossessed if you do not keep up the repayments on your mortgage or any loan secured upon it. You can pay for our mortgage advice service by a combination of fee only or commission that we would receive from the provider. The level of any fee would depend on the circumstance of the case but we would estimate the fee to be 0.5% of the loan advanced.
Veracity financial planning is not responsible for, nor does the Financial Services Authority regulate advice given with regard to taxation matters regard to trusts; some aspects of tax advice; commercial mortgages or second charge secured lending.