"Equity Release should form part of your Estate Planning process and it is essential that it fits with yours and your family’s needs. "
Please be aware the below blog is older than 12 months, therefore the information may not be relevant or up to date.
If you're over the age of 55 and a homeowner, equity release offers you a way to use the value of your home to raise money. However, before I continue, it is essential to point out that any form of equity release will reduce the value of your estate and can affect your eligibility for means tested benefits.
You certainly shouldn’t make any decisions lightly and ought to look at these alternatives before making any irreversible choices!
- Downsizing from your current home and moving to a smaller and more economical house.
- Selling your home to live in rented accommodation. If you have a property which is likely to sell for over £400,000 you could look to invest the proceeds in income-producing investments. The income from these can then be used to pay for the rental of a property.
- Check to make sure you are getting all the benefits you are entitled to. It may be that you are entitled to benefits that make equity release unnecessary. Also, equity release could affect your entitlement to means-tested benefits.
- If you have savings or investments, you may wish to consider using these.
If these options aren’t viable, it’s important to understand the different types of equity release available and their respective advantages and disadvantages.
Broadly speaking, equity release schemes fall into two categories: Lifetime Mortgages and Home Reversion Plans.
Lifetime mortgages
A Lifetime mortgage is a long-term loan secured against your property.
Interest is added to the loan throughout your lifetime and the entire amount is repaid when you (and your partner) die or go into long-term care.
Advantages
- Choose a cash lump sum or regular income
- You still own your home
- Some plans enable you to guarantee an inheritance for your family
- Plans can be taken out as young as 55
- May allow you to make interest payments, to stop the debt growing
Disadvantages
- Inheritance amount will be reduced
- High interest rates
- Early repayment charges may apply
- Tax position and state benefits may be affected
- Interest is compounded so loan grows quickly
Home Reversion plans
With these schemes you sell a portion of your home in exchange for a tax-free cash lump sum and a guaranteed lifetime lease with no monthly repayments. You can stay in your home for as long as you choose.
Advantages
- No monthly repayments to make
- You know what proportion of your home you are selling at the outset
- You benefit from any increase in value of the share of the property that you retain
- There is no risk of negative equity
- You can stay in the property as long as you wish
Disadvantages
- You will not receive full market value for the share of the property that you sell to the scheme
- Reversion plans cannot usually be reversed
- Tax position and state benefits may be affected
Of course, this brief introduction to equity release is just the beginning! If you're considering releasing funds from your home or just want a better understanding of this complex topic, MoneyAlive’s Equity Release Box Set is a great resource. Available to watch here, the set provides further information about both types of scheme as well as the amounts you can typically raise, eligibility, the advice process and the potential impact on means-tested benefits.
Equity Release should form part of your Estate Planning process and it is essential that it fits with yours and your family’s needs, circumstances and preferences. If you'd like to look further at what options are available to you, I would be delighted to help.
By Daren Wallbank
Equity Release will reduce the value of your estate and can affect your eligibility for means tested benefits.
