A guide to the increasingly popular equity release mortgages and their pros and cons
Equity release allows you to borrow against you the value in your home whilst you continue to live in it. This is aimed at those aged 55+. Equity release has been soaring in popularity recently. Figures for the first three months of 2018 show that equity release lending has more than doubled over the past two years, from £394 million in the first quarter of 2016 to £870 million this quarter. There are a number of reasons for this; the aging population, shortfalls in private pension plans, retirees still facing indebtedness, the increasing cost of care and so on.
What plans are there?
There are really two main categories of equity release plans. The first are lifetime mortgages. Here you take a loan out against the property whilst you retain ownership of the property. You can take the loan out in a lump sum, or in staged payments. You can borrow up to 60% of the value of your property.
You don’t have to make any repayments whilst you are alive although some plans give you this option. The interest rolls up and is paid off on the sale of the property. If the property increases in value you will benefit from the increase in value. However the interest can build up surprisingly quickly. Try and draw down the loan in stages to minimise the interest that will accrue.
Most plans will have a no negative equity guarantee. This means that when your property is inevitably sold, and the associated costs to lawyers and agents paid, if there is not enough money left to repay the outstanding balance of the loan then your estate will not be liable to pay any more.
A home reversion plan works a little differently. This allows you to sell all or some of your home. In return you get a lump sum or regular payments. You can get up to 60% of the market value of your property. The size of the percentage you can take will depend on your age. The older you are the greater share you can sell.
Like the lifetime mortgage plan you have the right to remain in the property for the rest of your life. It will also have a no negative equity guarantee.
What are the downsides?
A key aspect to remember is that any form of equity release will reduce the size of your estate. This means you will be leaving less behind for your friends and family. Equity Release is something that you should discuss together.
If you opt for a home reversion plan it will not realise anything close to what you would get for your property on the open market.
It can also affect your entitlement to means tested benefits such as pension credit.
The arrangement fees can be expensive (£1,500 to £3,000) and so can the repayment charges.
You need to speak to an independent financial adviser, that you trust, if you are considering equity release. Then your next port of call should be us. Phone 02891 817715 or contact our property team by email at property@boydricesolicitors.com.
