Retirement is supposed to be the golden period when you should be able to reap the benefits of your working life. But as people live for longer and the cost of living increases, financial planning during retirement is becoming more and more significant. There are thousands of pensioners across the UK without enough cash to support their lifestyle during retirement and they are looking towards equity release plans for a solution.
Real estate prices have soared since the 1990’s and houses are essentially pots of gold waiting to be opened. But a house doesn’t turn into usable money unless it’s sold, and this is exactly where equity release schemes come into the picture. Equity release plans address this issue by allowing older homeowners to release some of the value built into their property and using it as cash.
Different people have different reasons for releasing equity from their home. Some people need more money to support their lifestyle after retirement, and equity release plans allow them to supplement their pensions for more comfortable monthly income. Others may need extra cash for a specific one off expense. This could be anything from building a conservatory, buying a car, or an international dream holiday!
Another important expense during old age can be paying for home care. Some people who require permanent care prefer living in their own homes instead of moving into a care home. As long as the owner is living in their home, the equity release scheme can remain in place. So an ER scheme can be used to pay for the provision of care as long as you’re living in your own home.
Equity release plans need to be closed once the owner has died or moved into a permanent care home. In case of joint applicants, this applies to the second applicant. So the house can only be sold when both the applicants have either died or moved into care. As such, ER can also be used to support paying for care in a care home, as long as the second applicant continues to live in the property.
Releasing equity can be a good option for those who own a property, and wish to increase their income or raise money for a particular cause. Equity release plans work for some and don’t work for others, so they need to be considered carefully before taking a final decision.
Equity release schemes are essentially loans that one can take out against the value of their property. This loan plus the interest that has accrued on it over the years is repaid once the owner has died or moved into long term care, and the house is sold at market value. In a time when living costs are on the rise, home owners are turning towards equity release as an option for financial planning during retirement.
There are two main types of equity release plans, the lifetime mortgage plan and the home reversion plan. Lifetime mortgage is exactly that – it is a loan that is designed to last the entire life of the applicant, and is repaid along with the interest when the house is sold. The applicant legally owns the house and can live in it as long as they live or move into long term care. In case of joint applicants, the house cannot be sold until both the applicants have died or moved into care.
In home reversion plans, a part of the house is sold to the lender. Once the house is sold, proportional share of the sale value of the house is repaid to the provider. Home reversion is not a loan against the house, but a notional selling of part of the house. Both equity release plans accrue compound interest on the loans.
One of the main advantages of an equity release scheme is that you can continue to live in your own home. Of course, that it generates an additional income is also an important advantage, but this could also be achieved by downsizing. Applicants can live in their home for as long as they live. Many people also use equity release loans to pay for home care, so that they can go on living in their own home.
Once the applicants have moved out or died, the equity release scheme ends and the house must be sold. The applicant’s family cannot continue to live in the house after this, unless the full amount of the loan plus interest can be repaid immediately by some other means. In case of home reversion plans, the loan amount increases in proportion to the market value of the house when it is sold.
Sometimes it may be necessary to add another applicant to an existing equity release plan. In cases where joint applicants get divorced, it may also be necessary to remove an applicant from a plan. It is possible to do this, in theory, but is subject to the lender’s terms and conditions for that particular loan. It is therefore important to seek specialist advice and guidance before taking any step related to equity release.
As property prices have risen dramatically over the past two decades, thousands of homeowners find themselves in a position where they own valuable property but require additional cash flow to support them during retirement. This has led to equity release plans becoming increasingly popular in recent times. These loans allow homeowners to continue living in their property whilst freeing up some of the value of the house in the form of a cash lump sum, or monthly payments.
There are mainly two types of equity release schemes, lifetime mortgages and home reversion mortgage. A home reversion plan is where you sell a proportion of the property in terms of value, and this loan is repaid after the house is sold. A lifetime mortgage means that you mortgage the home against the loan, and make interest payments over your lifetime. In both the loans, the balance is recovered after the house is sold. This is usually after the owner has died or moved into long term care.
As the equity release market has matured, mortgages have become more flexible in their terms. Today there is a wide variety of loans available in terms of how you repay, period of repayment etc. There are equity release comparison sites that can help you get an idea of the different types of loans on offer.
Equity release plans essentially offer loans against the property as collateral. As such, most equity release lenders require the applicant to have a valid home insurance policy on the property. This is meant to protect the property from damage due to different causes, such as fire or flooding. Home insurance in this case means buildings insurance and not just home contents insurance.
An independent financial adviser can give you objective and sound advice on equity release in general and give you information about the different equity release plans available. Too much choice can be confusing and an adviser can help you choose the right loan for you. An adviser can also provide accurate guidance on the procedure of applying for an equity release mortgage and the type of insurance you are required to get etc.
Equity release loans do not suit everyone, but could be the perfect option for many. Whether you’re looking to raise extra cash for a specific goal, or boost your regular monthly income, freeing up some of the equity in your property without selling your home could be just the option you’re looking for.
The answer to this question lies with the type of equity release mortgage has been recommended. For instance with lifetime mortgage, drawdown lifetime mortgage, enhanced lifetime mortgage and interest only lifetime mortgage schemes you will retain 100% ownership of the title to the property.
In these cases the lender, like any residential mortgage lender they will merely place a first legal charge on the property. This protects the equity release provider, in that once the property is sold on death or moving into long term care, the lifetime mortgage provider will have first call on any of the sale proceeds.
However, a different set of rules apply for a home reversion plans.
Due to the mechanics of these schemes, effectively you will only own a fixed percentage of your property. The reason being in that in exchange for the tax free lump sum you require, a portion of the property ownership is transferred to the home reversion company. Therefore, should the provider require 40% ownership in exchange for the tax free lump sum, then you will retain 60% ownership which is guaranteed for your heirs once the house is sold.
All of these plans, however, allow you to remain in your property until you and your partner pass away or move into long term care.