There are a growing number of people taking out cash in their homes. This is called equity release whereby you borrow a sum from the bank based on the value and outstanding mortgage on your home.
For example if you have a home worth £300,000 and your mortgage is £100,000, you can potentially borrow £200,000 depending on your age and income.
Is this a good idea?
It seems for many people it is a lifeline and a way to release money in a seemingly unprofitable investment. The price of houses go up every year so therefore your investment is rising, however what good is an investment if you can’t touch it? Many people are now asking this question.
What I think you have to ask yourself is, ‘is it worth taking equity out of your home?’
What exactly is equity release?
Equity Release schemes give older homeowners a way to turn some of the value of their homes into a cash lump sum or regular income. Whether this is for a new car, home improvements, a holiday, to pay off existing debts or simply to improve living standards, Equity Release schemes are designed to unlock the wealth that is tied up in your home.
There are two types of Equity Release Scheme:
- Lifetime Mortgages
- Home Reversion Plans
Life Time Mortgages
This is currently the most popular form of equity release, accounting for 95% of the equity release market. You would essentially take out a loan against your home and when you die, the lender sells your home, takes their payment back and leaves the rest to your heirs.
This means you do not have a monthly payment, instead the interested is compounded over the duration of the loan.
For example:
You and your partner are 65 years of age. You borrow £50,000 at 6%. You die at 84 and your partner dies at 85, the payment is not paid until the last surviving partner dies or goes into a retirement home. Your payment back to the equity release company would be:
£160,000
This is because the interest is being compounded.
Advantages of Lifetime Mortgages
- Available to those as young as 55.
- You benefit from any house price rises over the duration of the mortgage.
- You know how much money you will receive from the scheme at the outset.
- May still have enough money to leave to your heirs after mortgage is paid off.
Disadvantages of Lifetime Mortgages
- Your debt compounds over time, although this can be limited by only releasing money you need when you need it.
- The entire equity in your property may be exhausted, leaving nothing for your heirs.
- If you choose to repay the loan early, early repayment charges may apply.
- You may not be eligible for any means tested benefits from the government.
Home reversion plans
A home reversion plan is a different beast altogether. It means you sell all or part of your home to a reversion company. If you sell part of your home, the other part is held in trust for you.
When you have decided to sell to a reversion company they will give you a lump sum and allow you to live in the property rent free for the rest of your life or until you enter a retirement home.
When you die, or enter a retirement home, the reversion company will then sell your house and take the proceeds. If you have sold part of your house to them, they will take their cut and leave the rest to the trust.
For example:
You have a house worth £300,000, you decide to sell 50% to a reversion company, and keep the other 50% in a trust. They will not give you £150,000; they will buy 50% at a discounted price e.g. £100,000.
In 25 years time the last remaining partner dies or enters a retirement home. The reversion company then sells the house for £800,000. They then keep £400,000 for themselves as they own 50% and they give the other 50% to the trustee.
Advantages of Home Reversion Plans
- You know what proportion of your home will be used at the outset.
- You can leave a fixed proportion of equity to your heirs.
- Flexible home reversions now allow you to release the right amount for your needs today, whilst having a guarantee of further cash releases if or when required in the future.
Disadvantages of Home Reversion Plans
- You become a tenant in your home, as you have to transfer ownership of your property.
- You only benefit from any rises in house prices on the proportion you still own.
- If you choose to end the plan early, charges may apply.
- Your tax position and eligibility for means tested benefits may be affected.
Getting the right advice
If you are going to choose an equity release scheme make sure you get the right advice.
Here are some places you can visit to get some advice (This information is taken from the BBC website at Money Matters:
Financial Services Authority information
FSA: Equity release made clear
FSA factsheet: Raising money from your home
FSA consumer helpline: 0845 606 1234
From Overseas: +44 20 7066 1000
Safe Home Income Plans (SHIP)
Safe Home Income Plans (SHIP) is a company supported by the leading providers of home income and equity release plans.
It was launched in 1991 and is dedicated entirely to the protection of plan holders and promotion of safe home income and equity release plans.
All participating companies are pledged to observe the SHIP Code of Practice. Members display the SHIP logo in their brochures and other printed material as a guarantee to their customers.
Safe Home Income Plans (SHIP)
Tel: 0870 241 60 60
SHIP Members
Age Concern
Age Concern produces regularly updated fact sheets:
Raising income or capital from your home
Equity release and income-related benefits
You can also order a free printed factsheet by telephoning the information line on 0800 00 99 66.
Help The Aged
Help The Aged also has factsheets and further information available:
Help the Aged: Equity release
Equity release schemes factsheet
Tel: 0845 2300 820
Council of Mortgage Lenders
Council of Mortgage lenders: Guide to equity release
Home improvements
For help arranging home improvements and advice on financial help available.
Home Improvement Trust - Tel: 0800 783 7569
To find your local HIA:
In England: Foundations
Telephone: 01457 891 909
Scotland: Care and Repair Forum Scotland
Telephone: 0141 221 9879
Wales: Care and Repair Cymru
Tel: 029 20576 286
Northern Ireland: FOLD
Tel: 02890 428314
Age Concern factsheet: Financial help with repairs and adaptations
Financial Ombudsman Service
Lifetime mortgages have been regulated by the Financial Services Authority since October 2004. And since 6 April 2007 home reversion plans have also been regulated by the FSA.
If you have a complaint you should first contact the firm who sold you the product.
If you are not satisfied after this stage, you should contact the Financial Ombudsman Service:
Financial Ombudsman Service: Tel - 0845 080 1800
Further advice on benefits and money saving
Citizens Advice: Find your local office
Advice Guide: Benefits
Links and helplines on energy saving from BBC Radio 4’s Inside Money
Further Links and helplines on benefits
Counsel and Care: 0845 300 7585
Association of Independent Advisers (AIFA)
AIFA - The Association of Independent Financial Advisers
IFA Promotion
IFA Promotion
IFA Promotions: Guide to equity release
You can also call IFA Promotions to order a copy: 0800 085 3250
Guides are available in the following alternative formats: large print, braille and audio tape. Call the hotline if you wish to order an alternative format.
Popularity: 18% [?]
November 6th, 2007 at 3:02 pm
It is really a great post, No doubt.. But you need time to read it fully and I will try it on weekend. thank you for sharing.
May 20th, 2008 at 10:18 am
Good article Rob!
I’ve just discovered this website, Equity Release Warehouse, whilst discussing Equity Release with my parents. It answers most of their questions, and they are going to to speak to a financial advisor before deciding what to do…