If you’re considering equity release, it’s important that you understand the key terms and features of this type of financial product.
Equity release is a big decision, one that requires you to fully understand what you’re taking on. Ideally you should consult a financial adviser, as well as discussing your plans with your children or anyone who would be a beneficiary of your estate.
An annuity is a type of financial product that pays an income for the rest of your life.
Downsizing is when you sell your home, to buy a smaller one, or one that is of lower value. This is a means of releasing money tied up in your home without using an equity release plan.
A drawdown lifetime mortgage is a type of equity release plan that allows you to release money as and when you need it (up to an agreed limit). The advantage of this is that interest only begins being charged once the money is released. Lifetime mortgages are usually repaid when the last remaining home owner moves into permanent long-term care or has died.
If you choose to, you can repay your equity release mortgage at any time (either in cash, or by selling your home). However, if you do there may be a fee to pay in addition to paying back the money you released: this is known as an early repayment charge.
The amount (or percentage) of your home that you own, above any mortgage that may be outstanding on the property.
The Equity Release Council is the voluntary industry body for the equity release industry. Their code of conduct sets strict criteria to safeguard consumers, which members must follow:
A way that you can unlock the money tied up in your home to help finance your retirement. There are two types of equity release plan: home reversion and lifetime mortgage. Equity release is normally open to you if you are aged 55 or over, and own your own home with a small, or no mortgage. Plans are only available on your main residence, which must be in the UK.
See Early Repayment Charge.
When you die everything you own (after any borrowing has been deducted), is known as your estate.
This type of equity release plan works by you selling part, or all of your home to a reversion company. The company buys its portion of your home at under market value, banking on house prices to rise so that it makes a profit. Unlike a lifetime mortgage, the percentage of your home that you own never changes – if you sell 50% to the reversion company it remains that, and will not increase. Home reversion plans can be an option if you intend to leave an inheritance.
A few equity release plans will let you take your money as an income rather than a lump sum. Remember, however, that the income may only be payable for a set time at which point it may stop. If you are considering this option it is also worth getting advice about the possibility of releasing a lump sum, and using it to purchase an annuity, which pays a guaranteed income for life.
A Lifetime mortgage enables you to release money tied up in your home by providing a loan secured against the value of your property. While many providers offer a no negative equity guarantee that means you will never owe more than your property’s value, it can mean that there is nothing left as an inheritance when you die - although there will never be a debt left with your estate. An inheritance protection guarantee means that you can preserve a portion of your home’s value as an inheritance. However, as a downside, having an inheritance protection guarantee will reduce the amount of money that you can release from your home.
This tax is paid on death from the proceeds of your estate. The tax is charged at 40% on the value of your estate in excess of £325,000. A surviving spouses/civil partner does not have to pay this tax, and the deceased’s allowance of £325,000 may be carried over. This means that for married couples/civil partners, inheritance tax is only payable on estates worth more than £650,000, assuming no other property has been bequeathed to anybody else, such as children.The government has proposed increasing the inheritance tax threshold to £1 million for family homes from 2017.
Equity release plans run until the money is repaid, or until the last policyholder dies. So having a joint equity release plan means that your spouse or partner would not have to move home if they outlive you or you have to go into care.
This type of equity release plan works by you borrowing, or releasing, a percentage of your home’s value. The percentage you are able to release will depend on your age, with older borrowers able to release higher percentages than younger borrowers. Instead of making repayments, interest is charged on the amount you released, and increases the amount you owe. Some schemes now require regular payment of interest so this does no roll-up throughout the length of the plan. The mortgage is repaid on death, or if you have to move into permanent long-term care. Providers that are members of the Equity Release Council limit the amount that you can owe on a lifetime mortgage to 100% of the property’s value, subject to meeting the terms and conditions of the plan.
This is the percentage of the property’s value that you currently owe the equity release provider. With a home reversion equity release plan this percentage always stays the same. However, with a lifetime mortgage the amount you owe increases over time, especially where interest rolls up throughout the life of the plan.
Most equity release plans will allow you to take your money as a cash lump sum. This lump sum is tax-free.
This feature of most lifetime mortgage equity release plans ensures that you never owe more than 100% of your home’s value. Providers that are members of the Equity Release Council offer this guarantee as standard.
When equity release borrowing can be taken from one home to another if you decide to move. All equity release plans offered by Equity Release Council members have to be portable, and charge no penalty if you do move home, this is subject to the new property meeting the provider’s lending criteria.
On a lifetime mortgage, this refers to when the interest you have been charged is added to the amount you owe.
On a lifetime mortgage, this refers to when the interest you have been charged is added to the amount you owe. If the interest is charged annually it means that the interest charged on the amount you owe is only added once a year.
Home reversion plans are where you sell all, or part of your home to a home reversion company. It is then this company that owns the portion of your home that you sold.
Equity Release Advice Service (provided in partnership with Just Retirement Solutions Limited)
Retirement Guides Equity Release Frequently Asked Questions
If you decide to take out a plan, there will be a fee by Just Retirement Solutions Limited of £749 for advice and arranging a recommended equity release plan. You will only be charged if you decide to take out a plan. Their advice service carries no obligation.
Equity release may not right be for everyone. If may affect your entitlement to state benefits and will reduce the value of your estate.
Equity release may involve a lifetime mortgage or a home reversion plan. To understand the features and risks, ask for a personalised illustration.
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