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Equity
Release Lifetime Mortgage Plans – An Overview
What is Equity Release?
In simple terms equity release is the release of part of the value
of your property in the form of a cash sum or an income.
Equity is defined as being the difference between the value of
the property and any loans secured against it.
The amount released then becomes the interest of a third party,
typically a Bank, a Building Society or an Insurance company.
In today’s society many retired people manage on a small pension and
limited savings and are living in properties which, even with the
recent fall in house price values in some parts of the country
properties have nearly doubled
in value in the last 6 years.
The average house price in Scotland is now standing at £155,691
(Based on the BBC research -October 2008)
Equity release plans – also called lifetime mortgages, home
reversion or home income plans – are a way of releasing cash,
whether to provide monies in the form of a cash lump sum or regular
income, to buy a new car, to pay for a holiday, fund required or
desired home improvements, or simply to make every day life more
comfortable by increasing available income or capital.
These schemes essentially allow you to borrow money against the
value of your home, with the debt being repaid from the sale
proceeds after your death.
How they work
Whilst there
are a few of different schemes available offering lump sums and / or
regular income, they all work on the same principle.
The scheme lender provides you with monies which is secured against
part of the value of your property, in return for a share of the
proceeds of the property when you die.
The minimum age to qualify for these schemes is 55, and have no
outstanding mortgage, however it is possible to repay an existing
mortgage from the equity release monies.
Equity release plans are generally quite simple however can be seen
as a major step for many people and it can impact on certain state
benefits you may be in receipt of – or able to claim for, making it
essential to seek the advice of
an Independent Financial Adviser to explore any alternative options
and fully explain any financial implications releasing equity may
have..
Age Concern and the Financial Services Authority, the UK’s chief
financial watchdog, both strongly recommend taking independent
financial advice before proceeding.
Equity Release plans – Key features
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Option of a Lump Sum – a one off sum or on a drawdown basis as
capital is required
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Money released from the value of your principle residence is free of
tax, although if the cash is then invested there may be tax to
pay on any income or growth.
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You release money from the value of your current property and have
the guarantee to live therein for the rest of your life.
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The interest due on the monies released roll up and are paid back on
your death or the sale of your house in the event of requiring
residential care.
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Inheritance tax bills can be reduced as Inheritance tax kicks in at
40% on everything left behind over £325,000 (2009/2010). which
includes the value of your home.
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The value of property means that Inheritance Tax is no longer
something only the rich have to pay. Equity release plans are a
perfectly legal way of mitigating Inheritance Tax. They could be
used, for example, to give a child or grandchild the deposit to
buy their own property.
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They can also be used to pay for care bills without having to sell
up at what can be a traumatic enough time.
Equity release will not suit everyone. It is always worth
considering whether funds could be raised affordably from other
sources before going down this route.
Types of Equity Release schemes
Lifetime mortgages
The lender provides you with a lump sum or monthly income (or both)
you pay nothing – the interest is ‘rolled up’ and added to the
amount borrowed and is repaid out of the proceeds from the sale of
the property after you die.
How much you can borrow depends on the value of your home and your
age – the older you are, the higher the percentage of your
property’s value you can borrow
Home Reversion Scheme
You sell your home or a share of it to a reversion company for a
lump sum or a monthly income – or both and remain in the property as
a lifetime tenant.
Interest Only
You borrow a lump sum secured against the value of your home and pay
only interest each month, with the capital eventually being repaid
out of the sale proceeds.
Home income plans
These used to be the most popular type of equity release plans. You
take out a mortgage against your home and use the money to buy an
annuity which guarantees you an income for life. Mortgage payments
are deducted from this monthly income, although the original capital
is only repaid from the sale proceeds, normally after you die.
Shared appreciation mortgages
These are not currently available but have been popular in the past
and may be available again in the future. You borrow a lump sum
based on the value of your home; there are no repayments until you
die or the property is sold. Then the amount you originally borrowed
is paid back plus an agreed percentage of the amount by which the
home has increased in value.
Important points to consider
Your family
Equity release plans can be a good way of reducing inheritance tax
bills, they will also reduce what your family will inherit.
Whilst it is ultimately your choice to enter into an equity release
scheme, it is generally a good idea to discuss it with close family
members and/or anyone who might have expected an inheritance on your
demise as the overall effect of the scheme will be to reduce your
final estate.
If the property has been a family home for a long time, bear in mind
that your children or other relatives may also have an emotional
attachment to it. They may even have been thinking of living in the
property after you die.
Children or other relatives may be prepared to help you out
financially instead of you taking out an equity release plan. They
could then inherit the whole property. As Independent Financial
Advisers we will be able to advise on any tax issues involved.
Advice
Getting independent financial and legal advice before taking out an
equity release plan is recommended by both the charity Age Concern
and the Financial Services Authority, the
UK’s chief financial watchdog.
For further information on the subject, please contact us at
info@cpamc.co.uk
or telephone 01764652225
Contact us
for more information. |
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