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In later years there are many reasons why a homeowner might want to release a lump sum from their property. An equity release mortgage allows those who are between 55 and 95 to get a lump sum without having to sell and move house – something which can be a significant upheaval, especially for the older generation.
There are no rules about how your money should be spent, meaning that the lump sum can be used for anything from debt consolidation, helping a family member, or realising that dream holiday that you have been planning for years.
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A lifetime mortgage is a loan which is paid as a tax free lump sum and secured against your home. You do not have to make regular repayments; if you prefer, the interest can be added to the capital and the loan plus interest is repaid when your home is sold, when you die or move into long term care and in the case of couple, on the second of these events.
Lifetime mortgages are more flexible than Home Reversion plans, although you should be aware that if you chose not to make repayments, the amount of interest that is accrued can build up substantially. There are now some lifetime mortgage contracts which allow you to pay off all or some of the interest and/or capital.
Lifetime mortgages are available to people over 55 years old, and the percentage that can be released is dependent on the person’s age, state of health and the value of the property.
Interest rates for a lifetime mortgage are either fixed or tracker rates and they also come with a `no negative equity guarantee`. This means that after you die and your property is sold, if the mortgage cannot be repaid, your beneficiaries will not be required to pay off the difference.
With some lifetime mortgages you can have a drawdown facility which allows you to make smaller withdrawals which reduces the amount of interest which is accrued on the loan.
A home reversion plan allows you to sell of a part or all of your property at less than the market value in exchange for a tax free lump sum. In return you live in the property either rent-free or for a peppercorn rent, this means that you can live rent free in your property for the rest of your life – although you must agree to keep it maintained and insured. There are no monthly repayments to be made and when you die, the house is sold and the lender gets their share of the percentage agreed at the beginning of the contract.
You can usually sell between 20% and 60% of the market value of your home and it is available to those who are over 65. The sum you receive will depend, not only on the percentage sold but also on your age and on the home reversion provider.
A home reversion plan also allows you to stay in your home until you die or need to go into long term care. As you are selling a share of your home, there are no interest payments to consider. This makes it simpler to plan for the future as you will know exactly what portion is being left as inheritance.
You must consider that a home reversion plan, once committed to, cannot be easily undone – as you are selling part of your property. Ensure you discuss further with one our professional FCA regulated equity release advisers to understand which option is right for you.
Equity Release Considerations
As with any financial product, equity release does have its drawbacks and is not appropriate for everyone. There are, however, considerable misconceptions around equity release, some of which are not true or over exaggerated.
- Compared to a ‘standard’ mortgage, equity release can be seen as less cost effective as you will usually be charged a higher rate of interest. For those who decide not to make regular repayments the interest on a lifetime mortgage can also accumulate quickly.
- Compared to selling your property on the open market, selling your home through home reversion will often lead to you receiving less money for it.
- If you release too much equity on your property early on, it is possible you will not leave enough for later on in your retirement.
- To move after starting an equity release scheme you may need to pay off some of your mortgage to provide the equity to buy a new property – even if you are downsizing.
- Equity release is hard to reverse should you change your mind, so you need to be sure it is right for you.
- If you are in poor health and die shortly after the scheme as started the costs could seem relatively high.
- The funds released from equity release can affect your entitlement to state benefits, and with life time mortgages can make you liable to greater tax payments.
Of course, one of the main concerns for those with equity release is that it can affect how much you will be able to pass onto your family in inheritance.
If you are looking for some extra cash in your retirement and you are over 55, equity release can be an excellent way of tapping into the value that has accrued in your property.
To help find the best option for you, we work with FCA accredited partners to ensure you have all the advice you need to make an informed decision.