What is Equity Release?
Put simply, Equity Release is the handover of part (or all) of the interest in your home, in return for a cash payment. Payments can either be in a lump sum or taken as regular income, and are paid by the lending company to whom you transfer the interest in your property. There are no payments to the company during your lifetime(s) and the debt is paid off after your home is sold.
There are two types of Equity Release to consider. The first is ‘Home Reversion’ and the second is a ‘Lifetime Mortgage’.
‘Home Reversion’: With Home Reversion 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 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. It is important to note that in this case any growth in the value of your home would belong to the lending company, in proportion to the share sold.
‘Lifetime Mortgage’: A Lifetime Mortgage means that, 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).
There are a number of important points to consider before entering into an Equity Release scheme:
You should ensure that you have taken into account the effect upon your estate, as Equity Release will reduce the amount of your estate that is 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.
Although it is not mandatory, it is recommended that you should always take the advice of an Independent Financial Adviser (IFA) before entering into any equity release mortgage or home reversion scheme.
Whenever you are in doubt concerning any part of the scheme you should ask before you sign, and ensure that you receive satisfactory replies to your questions in writing.
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. In this case, 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 also 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.
If you want to raise cash, before entering into an equity release scheme you should be sure that it’s the right option for you. Consider some of the alternatives:
- Ordinary loans
- Borrowing from your children
- Interest only loans
- Government grants for home improvements
You should take care to consider all the alternatives before committing to any agreements.
Finally, are you eligible? This will depend on:
- Your age – usually you must be at least 65-70 years of age (some companies do allow younger ages)
- The value of your home – usually not less than £50,000.00
- The condition of your home – it must be in a reasonable state of repair
- Any 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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