Equity Release

The background

Against a backdrop of increasing life expectancy and poorly performing investments and pension schemes, equity release plans can appear the ideal solution to the problem of financing those potentially long retirement years. They offer older homeowners (usually aged 55+, but requirements vary) a tax-free lump sum or a regular income (or both, in some cases) by enabling them to unlock some of the value of their property – often their greatest asset – without having to downsize.

Before committing yourself to equity release, it’s essential to explore and understand all your options. Equity release is not suitable for everyone, and you should seek advice specific to your circumstances from an Independent Financial Adviser (IFA). Different schemes have different advantages – and disadvantages. Many are extremely complex. Not all offer good value.

If you need cash now or a regular income for the future, you may be better off downsizing or using your savings, or you may be entitled to state benefits. Bear in mind, however, that the latter will certainly need augmenting in some way if you are to enjoy a comfortable retirement.

Types of scheme

The number of equity release products is growing, so it’s important to shop around. Choose a provider who belongs to SHIP (Safe Home Income Plans), a self-regulating body set up by the lenders, and ensure you are clear about costs, including survey fees, legal expenses and administration charges.

The two basic types of scheme are lifetime mortgages and home reversion plans. Both can generally be taken out in joint names, which protects the interests of a surviving partner.

Lifetime mortgage

With a lifetime mortgage, you take out a loan secured on your home. This will be a percentage of the value of the property, and will vary according to your age.

The sum borrowed is repaid, with interest, from the proceeds of the sale of your home when you die or go into care. Meanwhile, you are free to use the loan as you wish. You can take it in the form of a one-off sum, a series of smaller amounts (known as drawdown payments) or a regular monthly income.

Home reversion plan

With a home reversion plan, you sell your home, or a portion of it, to a third party – either a company or an individual. In return, you are paid a lump sum and/or a regular income, depending on the details of the plan, and you can continue to live in your home for as long as you need to.

The minimum age at which you can join a home reversion plan is usually higher than with a lifetime mortgage. As a rule, the older you are when the plan begins, the higher the proportion of the property’s value to which you are entitled.

Bear in mind...

It’s important to be clear that, with a lifetime mortgage, you continue to own your home, subject to the conditions of the mortgage. With a home reversion plan, some or all of it belongs to someone else. In both cases, the value of your estate will be reduced.

The Financial Services Authority (FSA) regulates lifetime mortgages. Home reversion plans will come under its jurisdiction from 6 April 2007.