Equity Release Schemes
With savings interest and pensions hit hard by the current recession, and soaring fuel and food prices, many retired people face the increasing daily challenge of how to make ends meet.
One way to help relieve the daily struggle for retired homeowners is to take advantage of the recent house price boom which has seen house prices soar in value over recent years, and whilst falling now, are unlikely to fall to the level they were before. It is likely more and more of the elderly will turn to Equity Release Schemes to unlock cash from the value of their home.
Equity release mortgages, also called lifetime mortgages, home reversion or home income plans – are a way of releasing cash, whether to buy a new car, pay for home improvements or repairs, or make life more comfortable. Essentially these schemes allow you to borrow money against the value of your home, with the loan being repaid once your home is sold following your death.
There are a wide range of different schemes offering a choice of lump sums and/or regular income. They can be complicated products and are a major step for many people. Your home is likely to be the most expensive asset you own; it is also your home and therefore good advice is therefore key.
Independent financial advice is strongly recommended before proceeding. An independent financial adviser (IFA) will look at your overall finances to see if an equity release mortgage is really the best option for you and help find the right type of scheme. However, your solicitor will also advise you whether the scheme is the best option and whether there are other alternatives.
So what are the criteria necessary to benefit from these schemes? In most cases you will need to be at least 60 years old, have no outstanding mortgage and own a property in a generally reasonable condition.
There are several benefits:
- They can give a lump sum, or a regular income or both
- If the property is your principal residence, the money released is free of tax, although if the cash is then invested there maybe tax to pay on any income or growth
- No regular repayments (This does not apply to Home Income Plans)
- You do not have to down size or move to a less expensive area to unlock equity
- With reputable schemes, you are guaranteed to be able to live in your home until the day you die
- You may reduce your inheritance tax bills
- The lump sum can be used to pay for care bills without having to sell up
As with all these schemes, there are also disadvantages:
- If you die soon after taking out the equity release plan, you could effectively have “sold” your home, or a share of it, cheap.
- Interest can roll up quickly on the amount loaned so you may not be able to leave something from the sale proceeds to your family even though the lump sum you were lent only seemed a fairly small proportion of the home’s value
- If the scheme provides an annuity, annuity interest rates are very low but get higher the older you are
- In some cases, state benefits may be lost and you may have to pay extra tax
Not only do these schemes impact on you but also your family. Whilst they may appear to be the only solution to ease the financial burden of retirement, proceeding without getting legal advice before taking out an Equity Release mortgage is not recommended.
For more information contact Debbie Wason on 01635 521212 or debbie.wason@clmlaw.co.uk
