Tony Granger outlines equity release arrangements and describes how they work in practice.
Equity release schemes typically enable the property owner to take cash from the property by selling equity in it. Many people are ‘asset rich, cash poor’. Rising house and commercial property values mean that the property can be a store of value to be accessed to provide a capital sum or an income stream. This can be useful to pay for care fees, or to augment retirement income.
Commercially, it can be used to release cash to pay for new capital equipment, or for refinancing purposes.
Commercial equity release
This will be through a mortgage or re-mortgage, or a secured loan against the property, or partial sale of a property. Depending on the use of the cash released, interest payable on the re-mortgage loan may be tax relievable. Any loan raised would have to be paid back and arrangements should be made to do this, either using a capital repayment mortgage or from other sources.
Home equity release
These schemes enable you to release equity from your property in return for giving up a share of its value. There are two main choices to consider:
1. release equity through a re-mortgage, pay the interest (and capital, if repayment type), and retain the ownership of the property. Younger homeowners may prefer this route to fund for school fees, for example. This route requires proof of income and serviceability of the re-mortgage. The capital will have to be paid back at some stage; or
2. release equity through either a roll-up interest mortgage (a lifetime mortgage) or a home reversion plan. This is preferred by older (usually over age 60) people. The capital released does not have to be repaid and there is no requirement to service the interest on the loan, which is added to the loan.
The most popular is the roll-up interest lifetime mortgage, where the loan can be taken either as a regular income or a cash lump sum. The accumulated interest is added and only repaid when the house is sold. Note that interest is charged on the loan and also on the accumulated interest, so that the total amount can grow quickly. On death, the house is sold and the mortgage lender is paid back what it is owed and the balance is for the deceased’s heirs.
Under home reversion, a portion or the whole of the property is sold and you receive the sale proceeds. You enter into a lease giving you the right to live there for the rest of your life, but you will have to pay regular rent.
Safeguards
You will have the following safeguards under equity release for a lifetime mortgage:
- negative equity guarantee protection;
- remain in the property until the last of you and spouse/partner die;
- fixed interest rate (if required) for the life of the loan for an indefinite term; and
- no fixed requirement to make regular payments
Things you should know
- you can elect to pay some of the interest rather than have it accumulate – this increases the equity value for your heirs;
- you can receive lump sums in stages, rather than all at once;
- always ask for a reserve amount on application, so that more is available later, if required;
- shop around for the best rates and payback combinations to suit you. Some products have no upfront fees or valuation costs;
- you can come out of the arrangement, but this may be subject to penalties;
- the equity release provider will insist a solicitor advises you – especially if you wish to pass on wealth to your heirs. Discuss with heirs the possibility that the expected house value may not be there on your death;
- capital released from your home is generally tax-free. Income arising from the capital may be taxable;
- interest rates average around 6%;
- the older you are, the greater the loan to value. At age 60 from 25%, up to 53% of property value at age 84, is typical; and
- if the property is leasehold, you can do equity release, provided there are sufficient years available. It is possible to do a ‘turnkey’ arrangement where equity released extends the lease and also gives you capital.
Practical Tip:
If going into care an immediate needs annuity could be considered, with income payable directly to a nursing home, which is tax-free. This is a complicated area requiring professional financial advice.
