Equity release, your questions answered
Record numbers of home owners are choosing to unlock the money tied up in their homes through equity release schemes. The promise of access to cash without having to move is an attractive proposition but taking out money from your home to enjoy your retirement or provide financial help to family members comes at a cost. Louis Mathers, residential property lawyer with Parnalls in Launceston, Cornwall outlines the risks and answers some frequently asked questions.
What is equity release?
To understand what equity release is, you first need to understand what ‘equity’ in the context of home ownership means. Put simply, equity represents the difference between what your property is valued at and any money you owe on it.
Property valuation £300,000 minus mortgage £100,000 = equity £200,000
Equity release provides a way for you to tap into the equity available in your home while continuing to live there. Access is typically restricted to home owners aged 55 or over and is something often considered by people who want to raise funds but who do not want, or cannot afford, to do this by taking out a conventional loan or mortgage which needs to be repaid relatively quickly.
How do equity release schemes work?
Equity release schemes work by you giving away an interest in your home to an equity release provider who gives you access to cash which does not need to be repaid until you die or, in some cases, make a permanent move into a care home.
There are two main types of scheme available: home reversion plans and lifetime mortgages.
Home reversion plans
With a home reversion plan you have to sell part or all of your property to the equity release provider. In return, you will receive a lump sum or agreed instalment payments and retain the right to live in the property (rent free) for the rest of your life. Following your death, the property will be sold and the proceeds of sale used to settle your equity release debt. Depending on the terms of the plan there may be some money ring-fenced from the sale proceeds for your loved ones, but this is not always the case.
With a lifetime mortgage there is no requirement to sell anything to the equity release provider, but you will have to give them a legal charge over your home (similar to a mortgage) which will become repayable, together with accrued interest, when you die or move into a care home. As with home reversion plans, the cash can be paid to you as a lump sum or via instalments. Provided there is enough money available, it should be possible to agree that anything left over after the loan has been repaid should be passed on to named beneficiaries as part of your legacy.
To stop the interest charges getting too high, some providers will allow you to make payments towards the loan while you are still alive. This can help to reduce the amount that needs to be paid to clear the debt when you die.
Implications for your home
Whichever type of equity release scheme you use, it is likely that some limits will be placed on what you can do with your home. For example, most equity release plans can be transferred to another property so that you are able to move home if you want to. However, you will only be able to move to a property with sufficient value to provide adequate security for the debt owed to the equity release provider. Every case is different, but many providers will not accept age-restricted or leasehold retirement properties as adequate substitutes, which could restrict your ability to move or downsize if your needs change.
The money you receive from an equity release plan is not subject to tax in its own right, but may have tax implications. For example, if you choose to invest some of the money released you could have to pay income tax on any interest earned or capital gains tax if the investments are subsequently sold. There may also be inheritance tax consequences, depending on the value of your estate.
If you are currently in receipt of means-tested state benefits your eligibility to continue receiving them may be affected, as may your entitlement to ask your local authority to help you with the cost of any care you need.
I am interested in equity release, who can help?
Your first port of call should be to speak to an independent financial adviser, experienced in equity release matters and who, ideally, is a member of the Equity Release Council. They can review your personal circumstances and advise on the most suitable products to meet your needs. They can also give you an idea of the overall cost of an equity release scheme, so you can assess whether what you will gain justifies what your loved ones will lose through reduced inheritance or possibly no inheritance at all.
It is also important to discuss your plans with your solicitor so that you are clear about the legal consequences of going with a particular provider. They will look at the terms and conditions of the proposed plan and explain what they mean for you and your family. They will also deal with any conveyancing requirements, including completing the transfer documentation associated with a home reversion plan or the legal charge documentation associated with a lifetime mortgage. They will also be able to deal with any queries about the property that the equity provider may raise, such as ownership arrangements between you and your spouse or the occupation rights of any adult children still living with you.
Your solicitor can also advise you on anything else you may need to do as a result of taking an equity release, such as changing the terms of your will to reflect the reduced amount of money from your home that you will be able to pass on when you die, or making a lasting power of attorney to ensure someone you know and trust can access the money on your behalf if you become mentally incapable of handling your own affairs.
For a confidential discussion about equity release, or any other residential property matter, please contact Louis Mathers on 01566 772375 or email email@example.com
Has your personal information been shared without your permission?
Planning your escape to the country, what you need to consider – part 2
Government consultation on new national model for shared ownership
Choosing a partnership structure
Planning for what happens when you die by Deborah Adams
Changes to legislation could offer protection for tenants in the private rental sector
Move to the country - Part One
The risks of DIY probate
Will your septic tank still be legal in January?
The death knell for ‘kiss and tell’?
Making a will when you retire
Selling your property at auction
Not looking so good - your guide to compensation for botched non-surgical cosmetic procedures
New threshold of seriousness in defamation proceedings
Legal considerations when building a granny annex
Choosing the right person for your power of attorney
Formal Interviews - Do you need legal representation?
Privacy rights and aerial images
Trustees’ duty to give information to beneficiaries
Five problems with a leasehold property
Taking your first commercial lease
Is your organisation protected from employee social media legal risk?
Have you been targeted by negative social media posts?
Farmers be alert when being inspected
Help for House Sellers?
Don’t let your digital assets end up in a digital grave
Valuing an estate for probate
Development proposals and your local authority search
What can you do if your child is injured in a serious accident
NetRights welcomes new protection for social media users
SHOULD I GET A LAWYER FOR A SPEEDING OFFENCE?
Supreme Court recognises that social media is a “casual medium” in libel battle
Choosing the best conveyancer who is right for you
Making a will after a second or subsequent marriage
Option or promotion agreement – which is best for landowners?
Anonymous pub and restaurant online reviews leave a bad taste
Have you had an accident involving a horse?
Help to Buy – beware of some cracks in the structure
Understanding Lasting Powers of Attorney
Changes to Energy Performance Certificate for Landlords
Had a cycling accident? Your route to obtaining compensation
New year, new home: tips to sell your home in the New Year
Tax Planning for your inheritance
Hearing loss: when your employer may be liable
Buying a home for your retirement, five things you need to consider
Farmers plan to diversify after Brexit
Ministers press ahead with probate fee shake-up - reports BBC News
Botched dental treatment? You may be entitled to compensation
Why a Health and Welfare Power of Attorney is a good idea
Will the new charge on building developments in Cornwall affect you?
Energy Performance Certificates – Do They Matter?
HMRC Challenging Stamp Duty Land Tax Payments
Ben Mitchell qualifies as a solicitor
The potential implications of Brexit on employment law
Appointing a guardian for your children
Houses in multiple occupation – new rules from October 2018
New Agriculture Bill published
Will Brexit affect my pension?
Dreaming of a holiday home? Sort out the legals before putting your feet up
Lasting Power of Attorney by Deborah Adams
Settled status after Brexit by Alexis Hager
How to choose an executor to administer your estate when you die
How overage agreements can boost profits from your land
Top tips for first-time buyers
How Could Brexit Affect My Farm?
Wills & Succession in Spain by Deborah Adams
Brexit – an international and local view by Alexis Hager, Litigation
Capital gains tax - important facts for non-residents of the UK
Buying a home: the importance of making sure the seller is entitled to sell
Changing a will after someone has died: it is possible and it could save you money
Your responsibilities when you have people working in your home
Sad passing of Battle of Britain pilot who served with Parnall family member
Considerations when buying a heritage property
Disciplinary proceedings at work: guide for employers
Employers should have a disciplinary process in place, but just following this may not be enough to avoid falling foul of the law and exposing yourself to the risk of an employment tribunal claim.