What is Equity Release?
Put simply it is the handover of part or all of the interest in your home in return for a cash payment – either in a lump sum or regular income – from the lending company to whom you transfer that part or whole of the interest. There are no payments to the company during your lifetime(s) and the debt rolls up until it is paid off after your home is sold.
Equity Release comes in two main formats. The first is ‘Home Reversion’ and the second the ‘Lifetime Mortgage’.
‘Home Reversion’: whereby you sell all or part of your home to the lending company and continue to live there during your lifetime as a tenant rather that as the full legal owner. The lending company grants to you a lifetime lease at a peppercorn rent and protects its interest in the property by making you responsible – under the terms of the lease – for the insurance, repair and maintenance of your home. You should note that any growth in the value of your home would belong to the lending company in proportion to the share sold.
‘Lifetime Mortgage’: whereby in return for a cash payment you transfer part of the equity and allow a charge to be placed on your home at the Land Registry: as there is no transfer of the legal title to your home, you would continue to live there as legal owner. You will still be obliged to insure, maintain and repair your home during your lifetime(s).
You may wish to take into account the effect upon your estate of entering into such a scheme: this will result in reducing the amount of your estate left to your heirs/beneficiaries.
If you sell your home under a Home Reversion scheme you will not have to pay Capital Gains Tax, but may have to pay Stamp Duty if the sum received is more than £125,000.
You should ensure that any State benefits you may be receiving will not be affected by receipt of an income or lump sum raised by the equity release scheme.
You are recommended always to take the advice of an Independent Financial Adviser (IFA) before entering into any equity release mortgage or home reversion scheme. However, it is not mandatory and you can, if you wish, go directly to a company offering a scheme; alternatively, you can go to an adviser representing just one plan provider. The choice is yours.
Whenever you are in doubt concerning any part of the scheme you should ask before you sign. Ensure that you receive in writing satisfactory replies to questions you want answering.
You should check that the scheme you choose allows you to move home in the future should you consider this to be an important factor.
SHIP and Legal Advice
It is very important that you seek expert legal advice before entering into any equity release scheme. Additionally, you should ensure that the lending company you choose is covered by the SHIP (Safe Home Income Plans) Code of Practice. This will provide that the solicitor from whom you obtain legal advice will be obliged to sign a SHIP certificate indicating that the scheme chosen has been explained to you. You should ensure also that whichever scheme you choose carries a ‘no negative equity’ guarantee, meaning that your family will not be left with a debt as a consequence of you agreeing to that scheme.
So you want to raise some cash.
Before you enter into an equity release scheme you should be sure that it is right for you. Consider some of the alternatives:
- Ordinary loans
- Borrowing from your children
- Interest only loans
- Government grants for home improvements
You should consider all the alternatives before committing yourself.
Finally, are you eligible? This will depend on:
- Age – generally minimum of 65-70 (some companies do allow younger ages)
- Value of your home – usually not less than £50,000.00
- Condition of your home – in a reasonable state of repair
- Mortgages and loans already secured on your home – these will have to be repaid either before completion or with the capital raised
- Legal title – is it freehold or leasehold?
- freehold flats are usually unacceptable
- some companies will not lend on leasehold flats
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