Equity release

In this page:

How Equity Release works
Exploring your options
Seeking advice
Recap of Equity Release options

The current pensions crisis in the UK, coupled with rapid house price growth and an ageing population, mean many pensioners have been left feeling the pinch in retirement.  Lots of older homeowners find themselves classed as asset-rich but cash poor – having a relatively small income but with equity locked in their home.  According to retirement housing group Economic Lifestyle, the property owned by UK pensioners is now worth over £1 trillion.  This figure increased by £50bn in 2005 alone.  But how can pensioners access this money?
Selling up is an option, but it is a drastic one – most people are reluctant to move out of the family home, and the area they are familiar with.  The other option is to remortgage, but often this is simply not viable for older homeowners.

Equity release, however, could be a solution for many older homeowners who find their retirement income falls short.  It could also help those who wish to release a lump sum in order to help out a family member or perhaps to reduce their Inheritance Tax liability (IHT).
The equity release sector offers two main product types:  lifetime mortgages and reversion schemes.  Both can be appropriate for a wide range of older homeowners.

How Equity Release works
By far the most popular type of equity release scheme is the lifetime mortgage.  It allows you to secure a loan on your property which is paid off upon its sale – usually on your death, or when you move into long-term care.
You can choose to repay the interest only during the term or wait until the property is sold and use this money to pay off the original amount borrowed plus the interest (a roll-up loan).  Choosing a lifetime mortgage will mean the advice and sale processes you take part in are regulated by the Financial Services Authority (FSA), the independent watchdog for UK financial services.  Rather than taking a loan out on your property, a reversion plan or scheme lets you sell all or part of your home.  You can then stay in the property, usually rent-free, until you die or go into long-term care.
Reversion schemes cannot be reversed or cancelled and you will miss out on any increase in the house price if you sell the entire property.  Unlike Lifetime mortgages, reversions are not yet regulated by the FSA, but plans to include them are in the process of being completed.

Exploring your options
It needs to be stressed that equity release is not the only route available to those in retirement.  You could downgrade to a smaller property or, if you wish to remain in your home, you could try checking your eligibility for state benefits – you may be entitled to more than you currently receive.
There are also certain points to consider with equity release which may have a bearing on whether it is suitable for you or a member of your family.
First of all, although you do not have to inform your family of any financial decisions you plan to make, it may be sensible to talk it over with them.  They could be in a position to help you out with your finances.  Also, if it affects your estate, you may wish to inform any beneficiaries of your decision.
If using equity release to finance home improvements, you should check eligibility for a local authority grant.  This could cover certain repairs or improvements, rather than having to use your property to secure finance.
Your entitlement to any state benefits, such as pension credit or council tax benefit, could be affected by equity release.  It adds to your income or your personal wealth, and so could make you ineligible for certain benefits, or for the level of benefits you are currently on.  Citizens Advice can provide help on this matter, as can a financial adviser.

Seeking advice
Those considering equity release should visit a financial adviser at the outset.  Legally, you are also required to speak to a specialist solicitor.  Specialist financial advice and legal advice are both essential. 
When it comes to actually choosing a scheme, you will find most equity release providers require that you property is worth at least £40,000 and is structurally sound.  Any current mortgage on your home should also be paid off.
Another final point to consider with equity release is the time it takes to put the deal in place.  It can be a lengthy process, taking anything from around four months up to two years to complete.  Although this means you will not have access to any funds quickly, it will also ensure you have thought the process through properly and discussed it with many people.
The most important point to remember is that you must do your research thoroughly before you make a decision. 
Check out how a plan will affect your tax liability – a large cash sum could also affect your current and future tax situation, and not necessarily for the worse.  If your children are looking at a large potential Inheritance Tax bill, for example, releasing some of the equity in your home now may mitigate this.  But this is not always the case and you should speak to a specialist tax adviser for further details.

Recap of equity release options
Lifetime mortgage – the amount you borrow is secured as a mortgage against your home and you don’t have to pay anything back until you die or need to go into long-term care.  Interest builds up from the loan until it is repaid.  A no-negative equity guarantee ensures the lender will always accept the value of your home as full repayment for the loan and your estate will not have to pay anything on top.

Reversion schemes - with a reversion scheme, you sell part of the value of your home to a reversion company in return for either a cash lump sum or an income.  The amount you receive will be less than the value of the proportion you have sold.  You can live in your home for the rest of your life, but you will not be the sole owner and may have to pay rent.  When you die the property is sold and the reversion company keeps its share of the proceeds.

Home income schemes – a home income scheme is another type of product where the money from a lifetime mortgage is used to buy an insurance policy that provides a guaranteed income for the rest of your life.

Information source:  Your Mortgage and Remortgage publication