Equity release schemes are aimed at those 55 or over looking to free up some equity in their property, while continuing to live there and without making monthly repayments. Needless to say, there are both benefits and drawbacks to these types of schemes, where answers to the following frequently asked questions will help homeowners to make an informed decision.
What is equity release and how do this work?
A growing number of people in later life are finding themselves ‘property rich but cash poor’, where equity release is the process by which a homeowner can extract some or all of the wealth tied up in their property by way of regular payments or a cash lump sum.
There are two main types of equity release schemes:
• a lifetime mortgage: where a loan is secured against the property, but ownership retained, and the loan repaid from the homeowner’s estate once they die. The interest on the loan can either be repaid at regular intervals, or rolled up and repaid on redemption of the loan;
• a home reversion plan: where part or all of the property is purchased by the scheme provider, but the seller will be permitted to live in the property rent-free under a lifetime lease. When the property is sold, typically after the seller dies or moves into long-term care, the provider will be entitled to their percentage share by way of repayment.
What are the benefits of equity release schemes?
There are various benefits to equity release, although the advantages involved will depend on the nature of the scheme. In broad terms, equity release schemes will:
• give you tax-free cash, with the freedom to spend this on anything you want
• allow you and others to benefit from your wealth during your lifetime
• enable you to continue living in your current home, without the upheaval of moving.
The ‘no-negative equity guarantee’ offered by lenders approved by the Equity Release Council also means that the amount of money borrowed against the value of your home, plus any rolled-up interest, can never go above the value of that property.
What are the drawbacks of equity release schemes?
There are various drawbacks with equity release, although again the disadvantages will depend on the nature of the scheme. However, in broad terms, equity release schemes will:
• be unlikely to pay you the full market value for your home, where you will receive far less money, comparatively, than you would from selling the property on the open market
• diminish the value of your estate, where this will reduce the amount of inheritance that your beneficiaries would otherwise receive after you die
• potentially reduce your right to means-tested benefits, including funding for social care.
Which equity release scheme is right for me?
For each of the two equity release schemes, there are various options available, where it’s important that both the immediate and future needs of the homeowner are matched with the right type of scheme. The importance of seeking expert advice from a qualified professional cannot be underestimated, so that you fully understand the long-term implications, with sufficient knowledge of the risks, rewards and legal obligations under your preferred scheme.
Legal disclaimer
The matters contained herein are intended to be for general information purposes only. This blog does not constitute legal advice, nor is it a complete or authoritative statement of the law in England and Wales and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its’ accuracy, and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should always be sought.