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You Are Here: Home > Personal Finance > Equity Release > Introduction
Last update : November 2013
Introduction to Equity Release

SCAM ALERT

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  • Here's the article

Say NO to -

  • All Cold callers

  • Grandly named companies located in impressive offices or areas (Mayfair, The Gherkin, Knightsbridge etc) offering yields of 10% - 30% a year

  • All firms that aren't regulated by the FSA. Make sure you call the firm in question from the telephone number on the FSA's website, many scam companies try to pass themselves off as legit firms

  • All firms that sell 'alternative investments' -
  • Carbon Credits
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  • Plots of land in sunny climates (Brazil if the big one right now)
  • Coconut plantations
  • Palm Oil plantations
  • African farm land
  • UK Burial plots
  • Rare Earth Metals
  • Anything where the yield is 10%+ and made to sound like it's easy (often they'll say it's guaranteed), and
  • Anything that's hard to get good information on yet easy to build a story - Rare Earth Metals and swamp land in Brazil masquerading as quality development potential are two good examples
  • If you're unsure of anything please feel free to email me, Alex Green

  • I can only help BEFORE you invest

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  • If you want to do you bit please try to educate the over 50s, the scammers love to target that group
Page summary:

Equity Release is a way for the over 55s to release built up equity in their property while still living in it.

The money can then be used to help fund a retirement. It's complex though and has many disadvantages. This guide goes into more detail.

What is Equity Release
Equity Release allows homeowners over the age of 55 to borrow money against the value of their property.

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 -

How does it work
There are two main ways to release equity in your property -
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.

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 Equity Release costs 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
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 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
LearnMoney.co.uk comment:
Personal Finance commentators generally view Equity Release as a lukewarm product at best. Concerns remain over -
  • Charges
  • Generally high 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 -


FREE Equity Release Guide

  • This LearnMoney guide offers a simple 5 Step process outlining exactly how to properly research the Equity Release market

  • It make sure you ask the right questions and get proper answers

  • Concentrates on the all-important costs and flexibility of the different Equity Release schemes

  • More details and to download your FREE copy

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