Equity Release – Financial Planning for Retirement

For retired property owners’ Equity Release can appear a simple option to obtain a large tax free sum of cash currently tied up in the bricks and mortar of their home.

However, as with all major financial decisions, professional advice should be sought to ensure that the chosen scheme is the right one for you.

So, what is equity release?

Essentially equity release is a financial product offered by money lenders to older property owners typically aged 55 – 65 years onwards.   The age criteria varies depending on the lender.

Currently there are two main forms of equity release:

Lifetime mortgages

A life time mortgage is a charge or mortgage against your property.   You will remain the owner of the property and the lender will register a charge against the Title of your property at the Land Registry.   When the property is sold all the sums due to the mortgagee will be paid off.   You can remain living in the property for the rest of your life or until you move into long term care.

Depending on the scheme chosen, the mortgage monies may be paid to you

• in one lump sum at the beginning of the scheme
• in sums drawn down as and when required, or
• in smaller regular amounts to supplement retirement income

Lifetime mortgages can require no repayment in which case the interest charged is compounded or ‘rolled up’. This can mean that the debt may double over a relatively short period of time.   Alternatively, some schemes allow interest only repayments or capital and interest repayments depending on the borrower’s ability to afford these.

Home Reversion Scheme

A Home reversion scheme involves selling a part share or all of the ownership of your property to the lender for much less than the market value.   As with the Lifetime Mortgage, you have the right to remain in the property for the rest of your life or until you go into long term residential care. If 100% of the property is sold, you will not benefit from any increase in value of the property.

As with Lifetime mortgages, the equity sum released can be paid in various ways depending on the scheme chosen.

No Negative Equity Guarantee

Current Equity Schemes regulated by the Financial Conduct Authority (FCA) will have a No Negative Equity Guarantee.   This guarantee provides that on death or entry into long term care the amount required to repay the plan will never exceed the value of the property when it is sold. This ensures no debt remains as the responsibilities of the beneficiaries of the borrower following the sale of the property.

Points to Consider

Deciding whether to release equity from your property can be extremely complex.   These are a few points to consider before making any financial decision:

• Equity Release schemes are very expensive.
• Will Equity Release affect the value of your assets in terms of Inheritance Tax?
• If you receive pension credits or state benefits, will these be affected by the release of funds?
• Will you be able to afford to downsize and buy a smaller property in the future?
• How will you cover the cost of long term care should you require it in the future?
• Will you be able to withdraw from the scheme in the future and how much will it cost in early repayment charges?

Get Expert Advice

For legal advice about equity release or any other aspect of property ownership contact our Residential Property Team.