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Guide to Equity Release
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The right of Mel Wright to be identified as the author of this work has been asserted by her in accordance with the Copyright, Designs and patents Act 1988.
The information in this guide is correct as of going to press, March 2014.
The opinions and information presented in this document are those of The Daily Telegraph and are not necessarily the same as those which would be presented by Key Retirement. Whilst Key Retirement is associated with this document, it accepts no responsibility or liability for the content of this guide.
Contents
04 Introduction 06 Why equity release? 08 Safety first
You r lif est yle in m ind 04
It’s been a difficult few years for people approaching retirement, as well as those who have already stopped work.
Six years of rock-bottom interest rates, combined with steep living costs and pensions that in many cases are lower than expected, have meant that many older people have limited disposable income available.
Many people are also facing an interest-only mortgage ‘time-bomb’, without sufficient savings set aside to repay their mortgage capital.
Interest-only mortgages allow borrowers to pay off interest but not the capital until the end of the term – having been tempted by the prospect of lower monthly payments.
Many have failed to put enough savings aside to repay the capital. Some will have relied upon an endowment policy maturing, however these haven’t performed as expected for many. The consequences being that they are left with no repayment strategy in place at all.
However, thanks to rising house prices in many areas of the country, a significant number of these people have a substantial amount of wealth tied up in their properties. This wealth is sometimes described as ‘equity in your home’ and is defined as the difference between the house value and any mortgage or secured loan attached to it or, where there is no outstanding mortgage or secured loan, the whole of the house value.
The problem these people face is that they need to sell their homes to free up this equity, and many simply don’t want the upheaval, stress and expense of moving to a new property.
Introduction
Your lifestyle in mind
Introduction 05
An alternative option to consider is an equity release plan, which allows you to unlock the equity from your home, providing you with the extra money you’re looking for to pay off your mortgage or boost your funds. Other reasons you might want to release equity include paying for home improvements, covering the cost of healthcare or to give money to children or grandchildren. If you are looking for a way to generate extra funds in retirement, this guide is for you. It is aimed at those aged 55 - 95 who are concerned about how they will cover costs when they stop work, or who want a lump sum of money to help a family member or to improve their home.
This guide outlines the different types of equity release plans, their costs, and how you can find the best impartial advice. It also explains what safeguards are in place to protect those who take out equity release plans and how to come to the right decision for you.
Why do I need independent advice?
Once you have read this guide fully, you should have a good idea of how equity release works and what it has to offer you. If you are interested in knowing more, contacting an independent specialist adviser, such as Key Retirement, should be the next step. They will be able to take a look at your circumstances and consider the whole financial picture for you and your family and will help you to decide whether equity release is the right option for you.
An independent adviser will be able to recommend an equity release plan from all of those which are available on the market, whereas if you speak to a company which sells its own plans it will only offer you advice on its own products.
Remember, you can speak to an adviser without any commitment to signing up to an equity release plan, and an initial chat about the options shouldn’t cost you anything.
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You r lif est yle in m ind
Why equity release?
An equity release plan can be a useful solution if you find yourself in need of an additional financial boost.
You can spend the money in any way you like...
•
Making home and garden improvements, such as an extension, new kitchen or adding a conservatory.•
Paying for a special holiday or to fund a family celebration.•
Helping your family or friends, perhaps with a deposit to get a child or grandchild onto the property ladder or for paying costly bills.•
Clearing an outstanding mortgage, loans or credit card debt.•
Passing some capital down to the next generation so they can benefit during your lifetime.•
Making it easier to meet day-to-day living costs.•
Buying a new car or caravan.Your lifestyle in mind
07 Why equity release?
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23% 16% 63% 31% 30% 22% Treat family and friendsHelp with regular bills
Home and/ or garden improvements Clear outstanding
mortgage
Pay debts (e.g. loans, credit cards)
Go on holiday
You r lif est yle in m ind 08 Safety first
It needs to be said straightaway that great care must be taken with any financial arrangement that affects the roof over your head. Safety and security certainly ought to be the main priorities for people in retirement when considering ways to generate cash lump sums. You should always take legal and financial advice before deciding what to do. You should consult your family as well as they will be affected by your decision.
Your lifestyle in mind
Safety first 09
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The rates on equity release plans vary widely, as do their terms and conditions. Plans that do not provide the guarantee that you can stay in your own home for as long as you live, whatever happens to interest rates or investment returns, should be avoided.
You don’t want your security in retirement relying on the volatility of money markets or share prices. It is important you only approach an adviser who recommends plans that come with guarantees that you:
•
Will never fall into negative equity. This means that you will never owe more than the value of your home.•
Have the right to remain in your home for life, or for as long as you choose.•
Have the freedom to move to another property without financial penalty (subject to provider criteria).The Financial Conduct Authority (FCA) has responsibility for the way that equity release plans are sold. This means that firms which sell the plans must meet FCA guidelines on marketing, sales literature and advice.
Customers benefit from statutory protection and, if needs be, access to official compensation schemes such as the Financial Services Compensation Scheme.
The options set out in this guide are not intended as a substitute for that process but as a brief guide to help you ask your adviser informed questions and those most likely to obtain answers useful to you.
Take great care with any financial
You r lif est yle in m ind 10
Your age, income, health and family circumstances are among the factors affecting which, if any, form of equity release might meet your needs. You typically qualify for equity release if you are aged between 55 and 95, own your own home worth more than £60,000 and live on the UK mainland or in Northern Ireland.
However, age and financial circumstances are both contributing factors when deciding which type of equity release is right for you and your family. Different plans are available at different ages, while some also allow you to leave a guaranteed legacy to your family.
You need to consider your entitlement to means-tested benefits when considering equity release. Where a homeowner may be entitled to some benefits, care must be taken to assess the impact on these of any arrangement made to generate a capital lump sum. Your adviser should be able to assess this for you.
The next part of this guide will give you a brief description of the different types of equity release plans available, and who they might suit.
Which equity release plan is right for me?
Your lifestyle in mind
Which equity release plan is right for me? 11
Lifetime Mortgages
A lifetime mortgage allows you to arrange a loan on your property where typically no interest is paid until after you die. Instead, the compound interest, on the money you borrow, rolls up until the total debt is finally repaid out of the proceeds of your estate when your house is sold. Interest will accumulate each month on a compound basis. This means that interest is charged each month on the amount of the loan as well as the interest accrued in the previous month. The more years that pass before the loan is eventually repaid, the bigger the final total interest charge. The total loan plus accrued interest and any applicable fees and charges are then repaid from the proceeds of the sale of your property when you and your partner die or if you both decide to move permanently into long-term care.
Lifetime mortgages can generate a cash lump sum which can be used for any purpose. There is no restriction on what you do with the money, and as the chart on page 7 shows, people use it for everything from home improvements to gifting to family members e.g. for a grandchild’s house deposit.
It is worth emphasising that lifetime mortgages with fixed rates of interest should be
considered by people who want an idea of how much could be left to their dependents, as they will know from the outset how much will be owed as the years go by. It is equally important to ensure, as mentioned above, that the homeowner retains the right to remain in the property for as long as they live, even if the value of the property falls.
Even where there is a guarantee that no interest need be paid on the loan for as long as the homeowner lives, no matter what the accumulated debt may represent as a proportion of the property value, careful consideration should be given to the way in which compound interest makes debts grow.
For example, at an annual rate of around 6pc, where no interest is paid throughout the plan, a debt will double in size in slightly more than 10 years. Therefore, it’s important to use an independent adviser who will get you the lowest rate – as with any type of mortgage. However, the longer the homeowner lives after arranging one of these mortgages, the smaller the proportion of the property value that will be available to pass on to beneficiaries.
A considerable part of any discussion with an adviser will be your views about the effects of the roll up of interest. Some plans also allow you to protect part of the property value against the roll up of interest, thus guaranteeing some of the value for inheritance.
You r lif est yle in m ind 12
Advantages of a Lifetime Mortgage
•
You retain full ownership of your home, which means that you or your estate may benefit from any increases in its value.•
Most interest rates are fixed, so you will be protected from increases in interest rates.•
A lifetime mortgage may be a more suitable option for younger people who may not be able to apply for a reversion plan due to their age.Disadvantages of a Lifetime Mortgage
•
The amount you leave as an inheritance will be reduced, and cannot be guaranteed.•
Generally, especially at younger ages, you can’t raise as much money with a lifetime mortgage as with a reversion plan.•
Most interest rates are fixed which means you will not benefit from any falls in interest rates.•
Early repayment charges may apply.Drawdown Plans
Depending on why you need the money from your home, a drawdown plan may be a better option than a standard lifetime mortgage which gives you a lump sum. These drawdown plans have become the most popular type of equity release.
Which equity release plan is right for me?
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Special plans for those in ill-health
If you have health problems, you might not think that equity release plans are suitable for you. However, there are special types of plan for those in ill-health which mean that you may end up receiving beneficial rates from some types of plan.
Enhanced lifetime mortgages are available for those with a wide variety of health conditions and lifestyle choices, These include those with diabetes, high blood pressure or a history of smoking.
Your lifestyle in mind
13
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Which equity release plan is right for me?
Drawdown allows you to draw money down in stages as and when you need it rather than taking out a larger sum. The advantage of this option is that interest is only applied to the money you have taken. This can dramatically reduce the overall cost. The example below shows how effective this can be. An independent specialist adviser will be able to discuss with you whether a drawdown plan will be a better option for you.
However, it is very important that you have legal safeguards in place such as a lasting power of attorney if you are going to use this type of plan.
In addition to the advantages and disadvantages of ordinary lifetime mortgages, drawdown plans come with their own pros and cons as follows:
Advantages of a lifetime mortgage with a drawdown plan
•
You can reduce the cost of equity release by releasing smaller amounts as and when required.•
These plans are flexible, meaning you can adapt to your changing needs in retirement.•
Your beneficiaries could end up with a greater inheritance.•
These plans can help you to organize your finances so that you don’t miss out on means-tested benefits.Disadvantages of a lifetime mortgage with a drawdown plan
•
There may be a minimum limit on the size of the lump sum you can take initially.•
Some providers may not guarantee the reserve facility that you can draw down from and it could be withdrawn at a later date.•
Future withdrawals can be at a higher interest rate than the initial lump sum.Comparison between a standard lifetime mortgage and a drawdown option of £64,000 released over 15 years with an interest rate of 5.89% based on a 70-year-old man
Drawdown at the end of the year Outcome after 15 years
Option Initial advance 5 7 9 10 Interest charged Total owed
Lump sum £64,000 n/a n/a n/a n/a £87,009 £151,009
Drawdown £20,000 £15,000 £8,000 £7,000 £14,000 £50,926 £114,926
You r lif est yle in m ind 14
Interest Payment Plans
If you still have a regular income but need to take cash out of your home, you could consider an interest payment plan.
These plans work more like an interest-only mortgage, so that you make interest payments every month on the money that you have borrowed. It is more difficult than in previous years to get an ordinary mortgage if you are older, and some retirees are using these plans instead of remortgaging to ensure that they can have more money now.
With most interest payment plans, you can choose the size of the interest payments you make every month, subject to a minimum. Each pound you pay off reduces the amount that your equity release provider takes out of the value of your home when the plan comes to an end.
Interest payment plans allow you to be flexible. If you decide to stop making interest payments, you can convert your plan so that the interest rolls up. This way, there are no repayments to make during the remainder of the plan. There may be a charge to do this. When the plan comes to an end – usually when you and your partner pass away or move into long-term care – any interest plus the amount of your original loan will be paid back to the provider.
Advantages and Disadvantages of Interest Payment Plans
In addition to the advantages and disadvantages of ordinary lifetime mortgages, interest payment plans come with their own pros and cons as follows:
Advantages
•
With an interest payment plan the amount taken from your property at the end of the plan is reduced.Disadvantages
•
If your circumstances change and you decide to stop making payments earlier than planned you may end up paying charges and a higher interest rate.•
Once you stop making payments you cannot restart at a later date.Your lifestyle in mind
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Which equity release plan is right for me?
Case Study: The Mawditts’ story
Like many people, Brenda and Graham Mawditt signed up to an interest-only mortgage years ago, and planned to use an endowment savings policy to repay their mortgage capital. The couple, who used to run boarding kennels, but are now retired, needed the endowment to provide them with £50,000 to pay off their mortgage.
Brenda, 66, said; “When we signed up for the endowment in 1987, we were told it could produce as much as £90,000 after 25 years, but then in 2007 we started getting letters saying that there would be a shortfall.
“The policy ended up providing only £37,000, leaving us with a £13,000 shortfall. We didn’t have savings to cover this, so we used an equity release plan to free up some money to pay off the mortgage.
“We ended up releasing a bit more than the £13,000, so that we could cover the cost of new windows for our bungalow. We did lots of research into equity release before we went ahead, so we knew all the pros and cons.
You r lif est yle in m ind
16 Which equity release plan is right for me?
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Home Reversion Plans
A home reversion plan involves you selling part or all of your home to a provider in return for a tax-free lump sum. You retain the right to stay in your home for as long as you live. With a home reversion plan, you do not make payments during your lifetime. When you and your partner die or you both move into long-term care, the home is sold and all or part of the property goes to the company that provided the reversion plan. Depending on the proportion that you sold to the company the rest goes into your estate.
The reversion provider will not pay the full market value of the share of your home which you sell because you will be living there rent free for the rest of your life. The amount you receive will depend on your age and the value of the share sold. If you have been a homeowner for much of your life, you may feel reluctant to sell part or all to a provider, which is what happens with a reversion plan.
However, it is worth bearing in mind that so long as you choose a plan where you
are guaranteed to retain your right to live in the home, the decision will not affect your day-today living in the family home. Plans that do not provide such a guarantee should be avoided.
If you opt for a reversion plan it is important to understand that you will be giving up any right for you or your beneficiaries to benefit from future increases in the value of the share you have sold.
If you take out a partial reversion where you retain ownership of part of your home, there is still a part left for inheritance. The amount you wish to raise will determine the share of your property you need to sell.
Advantages of a home reversion plan
•
You are able to guarantee an inheritance by choosing a proportion of your property to retain.•
You don’t accrue interest.•
You receive a tax-free lump sum to spend as you wish, with no monthly repayments to meet.•
You benefit from any increase in value of the share of your property that you retain.Disadvantages of a home reversion plan
•
You cannot usually change your mind as the property has been sold.•
The amount you leave as an inheritance will be reduced.Your lifestyle in mind
17
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Which equity release plan is right for me?
Are you worried about not leaving an inheritance?
Some people are put off releasing equity from their home because they worry about their dependents. In the current economic climate future house price growth could be muted and some fear that the debt accrued under a lifetime mortgage could therefore leave them with too little money for their family. If that sounds like you, a protected lifetime mortgage or a reversion plan could provide you with some comfort, especially if you do not need to release the very maximum amount possible from your home.
A protected lifetime mortgage comes with an additional guarantee. As well as ensuring that no negative equity will be created as a result of the equity release plan, a protected plan guarantees that there will always be an agreed percentage of your home’s value to be left to your beneficiaries, regardless of what happens to house prices. You agree to the provider reducing the current value of your home by the same percentage as you want to guarantee for the future, or that you only take a percentage of what you are entitled to take which in turn ensures that a share of your property will remain protected.
Advantages and disadvantages of a protected lifetime mortgage
In addition to the advantages and disadvantages of lifetime mortgages, protected lifetime mortgages come with their own pros and cons as follows:
Advantages
•
Gives you an ability to pass on an agreed percentage inheritance.•
No increased set up costs.Disadvantages
•
Limits the amount you can borrow at the outset.COMPARISON CHART
Feature Lifetime Mortgage Home Reversion Drawdown Plan Take smaller amounts of money when you need them
You r lif est yle in m ind
18 What to consider when choosing a plan
As well as understanding the difference between various types of equity release plan it is important that you consider your total financial situation and lifestyle factors when unlocking value from your home. Some important considerations include:
Long-term care planning
Advances in medical science have led to us all living longer, but this long life is often accompanied by frailty and a need for long-term care at the end. This can be extremely expensive.
Help from the Government and local authorities is available, but in many cases is means tested. Whilst the care funding system in the UK is in a state of flux and a cap on the total cost of care is being considered, the cost of funding long-term care should not be overlooked when considering equity release.
Your lifestyle in mind
What to consider when choosing a plan 19
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As mentioned earlier, lifetime mortgages enable you to raise cash while retaining ownership of the family home. Reversion plans enable you to sell all or part of the home with no repayments until after you and your partner die or you both move into long-term care. Depending on the value of your property and your family circumstances, equity release plans may be worth considering to fund long-term care as an alternative to selling the property outright and almost immediately.
An equity release plan does provide the option of giving care in the home as it allows you to free up some of the capital to pay for the care without having to move into a retirement or nursing home.
Equity release plans can also be used to pay for the purchase of an immediate care plan for a parent or spouse; these plans can reduce the potential long-term costs of providing care.
Death taxes
Inheritance tax – paid at 40pc by the estate of those who die leaving assets worth over £325,000 – is often known as the voluntary tax. This is because experts argue that with a little planning it can be avoided in most cases by giving away money in advance or using other tax-efficient strategies.
However, it is not easy to talk about and plan for your own death, which might explain why thousands of people per year still pay it. Rising house prices have also contributed to this. For many people their main asset is their family home and it is neither sensible nor easy to transfer this asset before they die.
Even if you have an absolute trust in your children, bear in mind that if a parent has given away part or all of their home to a child who, for example, subsequently becomes divorced or bankrupt, then their former spouse or creditors may force the sale of the home to fund payment.
You r lif est yle in m ind
20 Getting financial advice
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Equity release plans can also be used to pay for
the purchase of an immediate care plan for a
parent or spouse; these plans can reduce the
potential long-term costs of providing care
This effectively gives the last surviving member of a couple a £650,000 allowance before the tax is paid.
Even so, as this tax is levied at a fixed rate of 40pc on estates in excess of the nil rate band, it is perfectly possible to become a higher rate taxpayer for the first time after you die. Equity release can also help in allowing you to make gifts to your children now. Providing you survive the gift by seven years the amount is excluded from the value of your estate.
You should seek specialist advice on this though before taking such action. This raises the important point that, given the sums of money involved and the complexity of Inheritance Tax, you should always seek specialist tax advice before taking action in this area.
Means-tested benefits
The maze of means-tested benefits can seem complicated. Even so, there is no point in unlocking wealth in your home if all you achieve is to reduce your entitlement to state help. The good news is that some specialist advisers automatically work out your eligibility to these important benefits for you. They can help you release equity in a way which has little or no affect on your entitlements. It is important though that you consult with a specialist independent adviser who can work this out for you.
Some benefits to bear in mind include Pension Credit. This is an income related benefit made up of two parts - Guarantee Credit and Savings Credit.
In the 2015/16 tax year, Guarantee Credit tops up your weekly income if it’s below £151.20 (for single people) or £248.30 (for couples).
Your lifestyle in mind
Frequently asked questions 21
Who can use equity release plans?
Typically homeowners who are aged 65 or older can benefit from reversion plans while those aged 55 or older may be eligible for lifetime mortgages. These age limits apply to an individual or, in the case of couples, the younger of the two. You must own your own home and it must be worth at least £60,000. Leasehold properties typically with less than 75 years to expiry – unless extra years can be purchased; freehold flats and maisonettes or registered smallholdings may not qualify.
However, requirements differ between providers and an independent equity release adviser will be able to search the whole market to find the plan that suits you. He or she will also be able to get you a prompt answer about whether you and your property qualify for any particular provider’s plan.
How much will I get?
This will depend on your age, whether you are male or female; married or single; the
proportion of the value of your home you wish to use to generate cash and market conditions – such as interest rates – at the time the equity release plan is agreed. In some cases it will also depend on your health and lifestyle. However, you should expect your adviser to give you a clear illustration of how much you can expect, based on all these factors.
You r lif est yle in m ind 22
What will it cost me?
Surveyor’s fees and solicitor’s fees are likely to be incurred. Some equity release plan providers may make some contribution towards these costs for you. Some providers will refund these fees. Only where the surveyor recommends specialist reports to be done would you be responsible for the costs of these reports. There may also be fees for the advice you receive and some providers charge arrangement fees.
It is always important to have a solicitor that is familiar with equity release plans and it is important that their sole interest is to represent you.
Are there any repayments to make?
Not in your lifetime, unless you choose to do so with the interest payment plan previously mentioned in which case interest payments need to be made. You should only consider home reversion plans or lifetime mortgages which guarantee that no repayments will be required by you for as long as you live in the home upon which the agreement is based.
Repayment will then be made from the sale proceeds of your home after you die or move into long-term care.You should also bear in mind that an early repayment charge may apply if you want to repay the plan early.
Will I be able to stay in my home?
You should only consider equity release plans which guarantee the right to carry on living in your home for as long as you wish.
Can I apply if I have an outstanding mortgage on my home?
Yes. It will be a condition of the equity release plan provider that the outstanding mortgage is repaid. The equity you release can be used for this purpose. However, this will reduce the lump sum available to you.
What happens if I want to move home in future?
It makes sense to look for flexibility in equity release plans. You should expect to be able to move home if you wish, subject to you either repaying the amount secured under the plan or transferring the plan to your new home. As with normal mortgages you should also expect to pay the costs of buying and selling your home. Each provider has specific criteria that apply concerning moving home so you should check this when you take out a plan.
Your lifestyle in mind
23 Frequently asked questions
What happens if I have to go into a residential home?
If the property were to be left empty you would normally sell the home to which your equity release plan is secured and use the proceeds to repay the amount owed. However, if your spouse or partner continues to live in the home, it will not be counted in the means-test for help with long-term care fees and so will not need to be sold.
What happens when I die?
The sum outstanding from the equity release plan will usually be repaid from the sale proceeds of your property and the remainder goes to your estate. Where your representatives – such as children or other beneficiaries of your estate – have not sold the home typically within six months of your death, equity release plan providers may reserve the right to take control of the sale of the property and deduct the costs of the sale from the amount due to your estate.
Why should I seek advice when considering equity release?
There are many different products and offers available at any given time. By receiving independent advice you can be sure that only the plan that best suits your individual circumstances will be recommended to you.
What do I do now?
If you have decided to look further into equity release plans here are the next steps. In many cases the full process could be complete within eight to 12 weeks.
1. Contact a specialist independent adviser. 2. Arrange an initial consultation.
3. Carefully consider the written illustration of benefits and drawbacks which any recommended
equity release plan provides.
4. Apply for the plan which best suits your needs. If you decide to proceed, you will need to
authorise the equity release plan provider to arrange a valuation of your home.
5. Check that the written offer based on the valuation of your property is satisfactory to you. 6. Consult an independent solicitor who is familiar with equity release plans so that you can be
confident the legal work is done for your own interests and is correct. Once you have received your written offer plan providers should allow sufficient time for you to consult a solicitor.
7. If you decide to proceed, you can sign your acceptance of the contract and await the agreed
cash lump sum on completion.
You r lif est yle in m ind 24
Speak to the experts
You’ve taken your first steps to discovering financial freedom by requesting this exclusive
Telegraph guide, sponsored by Key Retirement. Key are committed to ensuring you have the
full story when it comes to unlocking the cash from your home. You can access a wealth of knowledge, experience and expertise by choosing this service.
Equity Release
For impartial information call Key Retirement FREE
on 0800 531 6032 or visit telegraph.co.uk/er1
Lines are open Monday to Thursday 9am-7pm, Friday 9am-5:30pm and Saturday 9am-1pm
Key are:
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The UK’s number-one independent equity release specialist•
Committed to offering exclusive deals that are regularly the best on the market
•
Consistent consumer and industry award winners•
Committed to delivering the highest levels of customer care•
Dedicated to providing each customer with a personalised, professional service
This is an equity release plan. To understand the features and risks, ask for a personalised illustration.
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Key can also help you get your finances in order with their Wills and Lasting
Powers of Attorney service.
Your lifestyle in mind
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