As you get older, you may need to pay for long term care bills, adaptations to your property, or perhaps for more enjoyable things like a new car, taking the family to Disneyland or a conservatory. However, once you’ve retired and don’t have a regular income from employment, it’s not always easy to borrow money or put savings to one side. Releasing the equity in your home may seem like the ideal solution – but it’s a big decision.
What types of equity release products are there?
There are three main types of equity release product on the market today. Always look for a product that’s received industry approval, shown by the SHIP logo (Safe Home Income Plans). SHIP is an organisation set up to promote safe equity release schemes. Companies who are members of the organisation provide a number of guarantees, including having the right to live in your property for life; the freedom to move to an alternative property without penalties; and never owing more (to the lender who advances you money), than the value of your property.
Home reversion plans – you sell your home (or a share of it), in return for a lump sum or monthly income (or a combination of both). Technically you become a tenant, living in your own home. When the property is sold (usually after your death), the reversion company will be paid.
Home income plans – you take out a mortgage against your home and use the money to buy an annuity. The annuity guarantees you an income for life. Interest on the mortgage is deducted from that monthly income (the capital sum is usually only repaid from the sale proceeds from your house, normally after you die).
Lifetime mortgages – you receive a lump sum or monthly income (or both) and pay nothing – the interest on that money is ‘rolled up’ into the loan. The amount borrowed plus that interest is repaid out of the proceeds from the sale of the property after you die.
Generally, lenders won’t advance more than 50% of the value of your property, and how much you can borrow depends on the value of your home and your age. The older you are, the higher the percentage of your property’s value you can borrow.
It may not be an easy conversation, but it’s important to talk about the implications with your family and see whether there are any alternatives, first. For example, if you’re struggling to cope with your property, could you move into a smaller property, instead? Your family may have a strong emotional attachment to your property, and they may want to help you financially, rather than give up the family home, or you may be able to borrow money from elsewhere. Particularly as, in most cases, the maximum amount that a lender will advance will be lower than the market value of the property, and of course it will also have an impact on what you can pass on to your heirs after your death.
Whatever your reason, if you decide that you’d like to use an equity release product then it’s vitally important to get sound financial advice from an independent financial adviser (IFA). An IFA will always make sure that you’ve taken steps to consider alternatives.