Record numbers of home owners are choosing to unlock the money tied up in their homes through equity release schemes. The promise of access to cash without having to move is an attractive proposition but taking out money from your home to enjoy your retirement or provide financial help to family members comes at a cost. Lancashire conveyancing lawyer Susan Ward, at Mooney Everett Solicitors in Ormskirk, outlines the risks and answers some frequently asked questions.
What is equity release?
To understand what equity release is, you first need to understand what ‘equity’ in the context of home ownership means. Put simply, equity represents the difference between what your property is valued at and any money you owe on it.
Property valuation £300,000 minus mortgage £100,000 = equity £200,000
Equity release provides a way for you to tap into the equity available in your home while continuing to live there. Access is typically restricted to home owners aged 55 or over and is something often considered by people who want to raise funds but who do not want, or cannot afford, to do this by taking out a conventional loan or mortgage which needs to be repaid relatively quickly.
How do equity release schemes work?
Equity release schemes work by you giving away an interest in your home to an equity release provider who gives you access to cash which does not need to be repaid until you die or, in some cases, make a permanent move into a care home.
There are two main types of scheme available: home reversion plans and lifetime mortgages.
Home reversion plans
With a home reversion plan you have to sell part or all of your property to the equity release provider. In return, you will receive a lump sum or agreed instalment payments and retain the right to live in the property (rent free) for the rest of your life. Following your death, the property will be sold and the proceeds of sale used to settle your equity release debt. Depending on the terms of the plan there may be some money ring-fenced from the sale proceeds for your loved ones, but this is not always the case.
With a lifetime mortgage there is no requirement to sell anything to the equity release provider, but you will have to give them a legal charge over your home (similar to a mortgage) which will become repayable, together with accrued interest, when you die or move into a care home. As with home reversion plans, the cash can be paid to you as a lump sum or via instalments. Provided there is enough money available, it should be possible to agree that anything left over after the loan has been repaid should be passed on to named beneficiaries as part of your legacy.
To stop the interest charges getting too high, some providers will allow you to make payments towards the loan while you are still alive. This can help to reduce the amount that needs to be paid to clear the debt when you die.
Implications for your home
Whichever type of equity release scheme you use, it is likely that some limits will be placed on what you can do with your home. For example, most equity release plans can be transferred to another property so that you are able to move home if you want to. However, you will only be able to move to a property with sufficient value to provide adequate security for the debt owed to the equity release provider. Every case is different, but many providers will not accept age-restricted or leasehold retirement properties as adequate substitutes, which could restrict your ability to move or downsize if your needs change.
The money you receive from an equity release plan is not subject to tax in its own right but may have tax implications. For example, if you choose to invest some of the money released you could have to pay income tax on any interest earned or capital gains tax if the investments are subsequently sold. There may also be inheritance tax consequences, depending on the value of your estate.
If you are currently in receipt of means-tested state benefits your eligibility to continue receiving them may be affected, as may your entitlement to ask your local authority to help you with the cost of any care you need.
I am interested in equity release, who can help?
Your first port of call should be to speak to an independent financial adviser, experienced in equity release matters and who, ideally, is a member of the Equity Release Council. They can review your personal circumstances and advise on the most suitable products to meet your needs. They can also give you an idea of the overall cost of an equity release scheme, so you can assess whether what you will gain justifies what your loved ones will lose through reduced inheritance or possibly no inheritance at all.
It is also important to discuss your plans with your solicitor so that you are clear about the legal consequences of going with a particular provider. They will look at the terms and conditions of the proposed plan and explain what they mean for you and your family. They will also deal with any conveyancing requirements, including completing the transfer documentation associated with a home reversion plan or the legal charge documentation associated with a lifetime mortgage. They will also be able to deal with any queries about the property that the equity provider may raise, such as ownership arrangements between you and your spouse or the occupation rights of any adult children still living with you.
Your solicitor can also advise you on anything else you may need to do as a result of taking an equity release, such as changing the terms of your will to reflect the reduced amount of money from your home that you will be able to pass on when you die, or making a lasting power of attorney to ensure someone you know and trust can access the money on your behalf if you become mentally incapable of handling your own affairs.
The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.