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

  • Option of a Lump Sum – a one off sum or on a drawdown basis as capital is required
  • 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.
  • You release money from the value of your current property and have the guarantee to live therein for the rest of your life.
  • 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.
  • 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.
  • 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.
  • 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.
 
27 West High Street
Crieff
Perthshire
PH7 4AU
Tel: 01764 652 225
Fax: 01764 654 433

 

Disclaimer - Equity Release

An Equity Release plan will reduce the value of your estate. It will not be suitable for everyone and may affect your entitlement to state benefit. To understand the full features and risks please ask for a personalised illustration.

Email: enquiries@cpamc.co.uk
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