Equity release schemes are designed for people aged 55 and over and are ideal if you own a property, have lots of assets and want access to this wealth in or near your retirement without having to downsize where you live. Equity release schemes all vary with most offering money to be released as a lump sum, however some are more flexible and allow money to be released in several, smaller amounts.
The amount you can release will depend on certain factors including: how old you are, the value of your home, your health and will also differ between providers. Providers will offer you the choice between two equity release products: lifetime mortgages and home reversion plans, which we will explain in more detail below. However, under new rules introduced back in April 2014, any firm that offers equity release products must offer you advice and must only recommend a product that is suitable based on the individual’s circumstances and requirements. This is great news for us, the customers, as the amount of information surrounding equity release schemes can be quite confusing and it is all too easy to make the wrong decision. If you feel you have been given insufficient advice or have been recommended a scheme that turns out to be unsuitable for your situation you must complain to the Financial Ombudsman Service.
The most common equity release plan is a lifetime mortgage and there are two different types – interest only and standard lifetime mortgages. Interest only lifetime mortgages allow you to borrow against the value of your home, whilst you still reside in it. Repayments are based on the interest accrued and you have the option to pay back all or part of the monthly interest until the mortgage has been repaid when the house is sold. Standard lifetime mortgages also allow you to borrow against the value of your home, but the interest is added on to the value of the mortgage and does not need to be paid back until your home is sold. If you have taken out one of these schemes and feel that it is not working out for you, you are within your rights to switch between the two different options. Lifetime mortgages will vary between lenders and it is always worth considering the following:
- Check the maximum percentage you can borrow, as this will determine the total amount. The general rule of thumb is that you are allowed to borrow up to 60% of the value of your property, however, this percentage will typically increase the older you are when you apply for the lifetime mortgage.
- Make sure you check what the minimum age is to be eligible for a lifetime mortgage. Most providers will insist that their customers are aged between 60 or 65, but there may be some exceptions.
- Providers need to be confident that you will be able to keep up the payments if you decide to take out an interest only lifetime mortgage. These plans will generally save you money, so check your financial situation as to whether this may be the better option for you. If you are unsure, seek financial advice from a specialist and always ensure that the firm you are using is on the Financial Conduct Authority register.
- Some providers will expect a certain level of maintenance to be carried out on the property and will conduct inspections from time to time. Make sure you know to what extent they expect the property to be maintained by asking for a documented list of requirements and find out how often and when the property is likely be inspected.
- Finally, find out whether you are able to withdraw the equity in small amounts or whether it must be a one lump sum.
This type of scheme allows you to sell all or part of your home to a home reversion provider at a discounted rate and in exchange they will give you either a lump sum or regular payments. You are entitled to stay in your property up until the point of death under the agreement that you will maintain and insure it at the sufficient levels, which will have been agreed within the contract. Generally you can expect to receive between 20% to 60% of the market value of your home. Similarly to a lifetime mortgage plan, providers will more than likely insist that you are aged between 60 and 65 before they will allow you to take out a home reversion plan.
It is always worth noting that both types of equity release plans come with their drawbacks. Equity release is an expensive option and debt can grow quickly if it not handled correctly. Many of these schemes are incredibly difficult to get out of if you have committed and signed up to them so it is absolutely essential that you know exactly what you are getting yourself into. Always seek advice from a professional and make sure you understand every last detail.