Introduction to Equity Release

It is a way of unlocking the value of your property, without having to move home. Money is paid out as a lump sum in cash or a regular income. There are no stipulations on how to spend this money.

This page of the LearnMoney.co.uk site offers an outline of what Equity Release is. It is however an umbrella term that is used to describe the two main form of loans which are known as -

• Lifetime Mortgages, and
• Home Reversion Schemes

1. Take out a specialist mortgage

In the Equity Release world these are called Lifetime Mortgages and the main features are -

• You borrow money which is secured against the value of your home
• The money is paid out via a cash lump sum, or a regular income, or a combination of the two
• You continue to own and live in your home until you die, or your spouse dies, whoever lives the longer
• Interest is charged but this is added to the value of the loan so that the amount of the original loan will therefore rise over time
• The loan and the interest charges are repaid when you die

The main downside as pointed out above is that as nobody knows when they will die there is also no way of knowing how large the loan will become.

As interest is charged on interest, so-called compounding, a loan taken out today for £50,000 will roughly double every 10 years. Live a long time therefore and the amount to be repaid on your death could be extremely large leaving little or no value on the property to pass on.

But most Lifetime mortgages come with a no negative equity guarantee which pledges that you can never owe more than the sale value of your home, no matter how long you live.

• See our main guide on Lifetime mortgages for more information

2. Sell your home (or part of it) but continue to live it

This style of Equity Release is called a Home Reversion Scheme and it works like this -

• You sell your property, or a percentage of it, to a reversion company
• You are allowed to live there until you die, or your spouse dies, whoever lives the longer
• No interest is charged on the loan
• When you die the property is sold and Reversion company takes it's profit
• For example, if you sold 40% of your home and it was sold for £100,000 your estate would receive £60,000 and the Reversion firm the balance of £40,000
  

However, you won't receive the full market price for your property when you sell it, or part of it.

For example, if you sell 50% of your house to a Reversion company, depending on your age, it will only pay in the region of 25% - 50% of the value.

But why do Reversion companies only pay a percentage of the value? Because you get to carry on living in your property until you or your spouse dies, and therefore the company may have to wait years for its return.

The main advantage to this type of loan is that you know exactly how what proportion of the house can be left to your beneficiaries. For example, if you sell 30% of your house, when you or your spouse dies there will be a guaranteed 70% to pass on.

The main disadvantage is cost. Recent research found that in almost all cases Home Reversion plans were normally the most expensive Equity Release option.

• See our main guide on Home Reversion schemes for more information

Who qualifies for Equity Release

• Anyone over 55 for a Lifetime mortgage
• But you usually have to be 65+ to get a Home Reversion plan
• A property owner with no mortgage, or just a small one
• People who need a minimum of £15,000 - £25,000 - Equity Release is a complex tool and it is unprofitable for companies to get involved in small amounts of money

Who owns my home

• Lifetime Mortgages - You do, although it will have a mortgage attached
• Home Reversion - The Reversion company owns the percentage your originally sold them, perhaps 50% and you own the balance.

How is the money paid

Not all Equity Release schemes pay money in the same fashion. Expect one or more of the following -

• Receive a cash lump sum (or the ability to drawdown money when needed)
• Receive an income for life, or
• Both a lump sum and an income for life
  

If you opt to receive an income this will normally be paid via an Annuity. How much you'll receive depends on a number of factors, including your age, whether you're a man or women, and the state of your health. The older you are, or the poorer your health, the more income you'll receive.

Equity Release providers
Age Partnership Equity Release Cus4 Equity Release	Key Retirement Solutions AVIVA Equity Release

Regulation in the Equity Release market

All Equity Release schemes are regulated by the UK's financial regulator the Financial Services Authority (FSA). An added safety factor is that you can only be advised on these deals by advisers who have taken and passed specialist Equity Release exams.

FSA regulation means that to sell these financial products companies have to obey and follow certain rules and guidelines. These are there to protect the buyers.

If something does go wrong the first people to contact are both the adviser and the lender as they have set rules in place to deal with complaints.

If the problem persists then you always have the right to make a formal complaint to the Financial Ombudsman.

What is SHIP and why is it important

Safe Home Income Plans, SHIP for short, is a voluntary code for the Equity Release companies to follow. The majority of providers are signed up to this code.

If a firm is a member of SHIP then they have to follow a code of conduct and offer the following guarantees to their customers -

Important - Fees & Charges

As with any financial product you're strongly advised to put plenty of effort into looking at how the fees are charged as well as if there are any other related charges.

Failure to do this might mean you get grossly overcharged or buy the wrong product for your needs. And with something as important as Equity release this could mean you financially suffer in later life.

It doesn't matter which style of Equity Release plan you choose because the average costs of arrangements is now similar for both lifetime mortgages and reversion schemes. The main points are -

• Administration fee : £150 - £300 (normally only charged if you decide not to go ahead with the deal)
• Arrangement fees : £500 - £1,000 (sometimes priced as a percentage of the total loan)
• Valuation fee : £200 - £500
• Legal costs : £500 - £1,000
• General advice : £500 - £1,000
  

Add all of those up and it can start to become expensive especially when small amounts of money are looking to be released. Signing up to an Equity Release scheme is therefore not that cheap.

How to research fees and charges

As indicated before not all Equity Release deals are the same which can mean that comparing like with like is difficult.

So the way to research fees and get a better idea of how things work is to break down and list each fee and charge from each provider. Put this information on a piece of paper, or use a spreadsheet if you're computer literate.

By comparing the charges you'll soon be able to see where and how the different deals work and their advantages and disadvantages when it comes to price.

It is important to do this because many financial products are heavily marketed on certain price points but they keep quiet about others. For example, one deal might offer a discounted interest rate which looks fabulous but there will always be minus points which should be taken into account.

The finance industry is not known for offering free money so what often happens is that other fees are increased and buried in the small print. What therefore looks like a great deal on paper could well turn out to be very expensive.

So I state again, this research is not only critical, it's imperative if you want to get the right deal at the right price.

Equity Release providers
Age Partnership Equity Release Cus4 Equity Release	AVIVA Equity Release Key Retirement Solutions

Equity Release and Tax

Any cash lump sum produced from releasing equity is free of both Capital Gains tax (CGT) and income tax.

However, if the lump sum is then used to provide an income, perhaps you place it on deposit or buy an annuity, that income might be subject to income tax. This will depend on how much the income is and whether you have any other income to consider.

The income produced by a Reversionary Equity Release scheme is often provided by an annuity. This allows a percentage of each income payment to be regarded as a return on the capital used to buy it, and therefore tax-free. The balance is judged as interest and is taxed unless you are on a low income and not liable to tax.

Personal tax issues can be complex though and everyone's financial situation is different. So as part of any initial discussions with an Equity Release adviser you are strongly advised to seek advice on this matter. If there are reasonable sums of money involved it's often a good idea to seek out a qualified tax advisor.

Many people often balk at paying for this advice but it is my experience that a good tax adviser can often be an investment which pays dividends. For example, they might charge £1,000 for advice but save you £1,500 in tax.

Concerns remain over charges, interest rates, potential inflexibility, and in the case of Lifetime mortgages how much of your property's value can be left to your children or relatives.

Therefore the consensus is that Equity Release should be viewed only as a last resort - See alternatives to Equity Release

If you want to release equity within your property downsizing for most will be the best and cheapest financial option. The trouble with this is that many older folk are attached to their property and don't want to move. Sadly, not everyone can afford to have it both ways - continue living in the same property and excess cash in the bank.

Hard decisions therefore have to be made and taken.

So if you're considering Equity Release your first move should be to do as much research into the product as possible. This should include initial contact and face-to-face meetings with professionals - both those selling the product and those involved in the legal side.

Do this work and you'll be in a powerful position. The knowledge gained will mean you'll be able to get the right deal for your financial circumstances and at the right price.

Note - This page is an overview of Equity Release. To find out more see the pages relating specifically to the two main types of Equity Release loans -

• Lifetime Mortgages, and
• Home Reversion schemes