Equity release
Purpose
Equity release is a big decision that will affect the rest of your life. It will mean giving up full control over the home that you may have spent decades purchasing. You will also reduce the amount available to leave to your family. Before making that decision, you need to be clear in your own mind why you are doing it.
It could be that you have no choice. You may face expenditure, perhaps on the house itself, that simply must be incurred - or you may simply find that you are unable to make ends meet.
On the other hand, you may simply want to make a big capital purchase or increase your standard of living generally. There is nothing wrong with that. It is your money after all, but you can only spend it once so you have to make decisions about how you will use it.
Alternatives
Having decided that you need or want to incur the expenditure, you should also consider whether equity release is the best way to do it. Questions you should consider are:
l Do I have any other financial resources which I would prefer to use? l Would short-term borrowing or selling or mortgaging my home be better? l How am I going to feel about giving up control over my home both now
and in the future?
l How will my family feel if I am going to spend what they would otherwise inherit - do I need to discuss it with them?
l Will equity release affect my personal taxation (particularly in respect of Age Allowance)?
l Are there any state benefits or grants that I could use instead? l Will equity release affect state benefits I already receive?
Your local Citizens’ Advice Bureau can normally advise on state benefits.
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Equity release methods
You can release equity using three methods:
Downsizing does not involve any specific financial services product. You simply sell your home, move to somewhere cheaper and retain whatever money is left over after the move is complete and all costs are paid.
Home reversion also involves selling your home but you do not move out. Instead, you retain the right to live in it, rent free, for the rest of your life. If you move out permanently before then for any reason, the provider will then sell your home and retain the proceeds.
Providers of home reversion arrangements tend to specialise in this market although some are subsidiaries of major financial institutions.
Equity release mortgages do not require your home to be sold and you continue to live in it. Instead, the provider will make a loan to you in exchange for a mortgage over your home. You will not be required to repay the loan during your lifetime unless you permanently move out of your home. The loan will be repaid from the proceeds of the sale of the property when you no longer live in it.
All these methods have their benefits and all have certain disadvantages. These are some of the main ones.
Downsizing
Advantages
l You continue to own your home outright
l It will not affect the right fo family members to continue to live there after your death
Disadvantages
l You will have all the cost and hassle of moving l You may lose contact with friends and neighbours
l The funds released may affect benefits, grants and allowances
Home reversion
Advantages
l The money is yours to spend as you wish
l You are assured of the right to live in your home for as long as you need to - which could be very many years
l Because your home is no longer an asset of yours it will not be taken into consideration in assessing certain benefits (provided the arrangement was not entered into in order to achieve this)
l There will be no outstanding debt on your estate
Disadvantages
l Your provider will offer you considerably less than the market value in exchange for owning your property
l The funds released may affect your entitlement to state benefits and other benefits and grants
l You will receive considerably less than your home would be worth on the open market (this will vary with your age and the provider)
l Your home is no longer your property so you are not free to make alterations (this could be a particular problem if you need to make modifications to cope with an illness or disability)
l The provider will sell your home after you stop living in it and anybody still living in it will have to move out
l The lender will keep all the proceeds of the sale
l If you only continue living in your home for a short time after entering into an equity release arrangement then it will be have been very expensive (although you may be able to arrange for certain guarantees in exchange for a smaller lump sum)
l Although you are now a tenant, you are likely to be responsible for meeting certain maintenance costs which could be quite substantial
Equity release mortgage
Advantages
l The money is yours to spend as you wish (although there may be a restriction if the purpose included essential repairs or maintenance) l In most cases you will not need to make repayments as the interest
can be added to the loan
l Your property will remain your own, subject to the mortgage
l It may be possible to borrow more later if the value of your home increases l It may be possible to move to another property subject to valuation l Any equity left in the property when it is eventually sold will belong to
you and your estate
Disadvantages
l The maximum loan under an equity release mortgage is normally less than a standard mortgage
l The funds released may affect your entitlement to state benefits and other grants and allowances
l If interest is added to the loan you will be charged interest upon interest. The loan can become very large, making it hard to move house later, and possibly could even exceed the value of your home
l Your lender will require you to maintain and insure your home. (although it is generally considered unwise not to insure it anyway) l When your home is eventually sold anybody still living in it will have
to move out
l Interest rate increases may affect the rate at which the loan amount grows
All three methods will incur legal costs. If you choose a home reversion, this will include the actual transfer of the ownership of your home whilst an equity release mortgage will need the mortgage to be put into place. In either case it is likely that the provider will require you to obtain independent legal advice before the plan is completed.
If you downsize there will not necessarily be a product provider but you will still have to meet legal costs involved in selling one property and buying another; as well as Stamp Duty and all the expense of physically moving. Home reversion and equity release mortgage providers will require a valuation, at your expense. Whilst that will not be the case if you downsize and buy a new home outright, it will normally be prudent to commission a report by a chartered surveyor into the condition of your new home and that too, will involve expenditure.
Using your released equity
Having chosen which route to use in order to release the value in your home, you must return to the question of how you intend to use it.
If you simply intend to spend it all immediately then you can simply do so. However, if you are looking to use some or all of it to supplement your income then you must consider the best way to do so. Options include: l Annuities - a guaranteed income for life
l Investments - funds which can be drawn on to supplement your income as and when necessary. These are not usually guaranteed
We can provide independent financial advice on these options in advance of the completion of your equity release but an alternative is a “drawdown” equity release.
This is not an option for downsizing, unless you keep moving home, and would need a home reversion provider willing to enter into offer a shared ownership arrangement. This may be possible but such options are more commonly associated with equity release mortgages by means of further advances.
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Drawdown equity release
Advantages
l Interest will only accrue on a mortgage from they day the further advance is made and the debt grows more slowly
l Your share of any equity in a partial home reversion will continue to grow until another share is sold to your provider
l Because it is only a relatively small amount on each occasion it is unlikely to affect state benefits, or grants
l The “income” produced is seen as a release of your own money and thus not subject to tax
l As you get older you may be able to borrow against a higher percentage of your home (or sell to your home reversion provider at a more favourable rate)
Disadvantages
l There is not normally a guarantee that your provider will offer a drawdown arrangement in the future. You may therefore find your “income” stops. For example, this might happen if property prices fell or the interest added to your loan rose quickly
l You may have to pay further valuation fees to obtain further advances
Conclusions
Choosing equity release involves a number of important decisions and, in most cases, there is no going back. It will set you on a course that will affect you for the rest of your life and possibly your family after that. Those decisions are your responsibility alone.
Your adviser is just that, an adviser, not a prophet. They are there to enable you to make an informed decision, but not to make it for you. This book helps them, and you, by explaining those options, their main benefits and their possible drawbacks.
It may be that having made your decision, things happen that nobody expected which means that, with hindsight, an alternative would have been preferable. With equity release this is most likely to be that the plan ends earlier than anticipated so that the initial costs make it relatively expensive. Growth in property prices means somebody who chose a home reversion loses out, or that somebody choosing an equity release mortgage has the “misfortune” to live to a ripe old age and see the entire equity in their home eroded.
Whatever your decision whether it works for the best, or not, we hope you will be able to look back and understand why you made the decisions you did for many years to come.
Knill James Wealth Management Limited, One Bell Lane, Lewes, East Sussex BN7 1JU Telephone: 01273 921667 Fax: 0870 495 7783
Email: [email protected] Website: www.knilljameswealth.co.uk
