Equity release: Financial trap or retirement windfall?Posted on: 17 July 2012 by 50connect editorial
David Garfitt cautions prospective equity release policy holders about lifetime mortgages and home reversion plans.
David Garfitt, head of residential conveyancing at York and Lincoln based law firm Langleys is encouraging mature householders to think very carefully when considering equity release schemes as a financial retirement solution. David warns that there are pros and cons to the schemes which may make them suitable or unsuitable for people in different situations.
David explains: "Over the last couple of decades, soaring house prices have resulted in an increasingly buoyant property market. As more and more home owners find themselves entering retirement - 'asset rich and cash poor' - equity release schemes are becoming a popular way to generate an income while allowing home owners to stay in their current property.
Equity release refers to the process of releasing or 'unlocking' part or all of the excess value on a property - excluding what is still owed on any mortgage."
In order to apply for an equity release scheme, candidates need to be in their mid fifties, although some schemes start at sixty, and should own their home with no mortgage or have only a small loan outstanding.
David continues: "There are two types of equity release; lifetime mortgages and home reversions. The first allows a loan to be secured against your home. This loan is then repaid when you die and your house is sold. Home owners can take out a 'lifetime mortgage' and still 'own' their home. The second, home reversion, refers to when all or part of the property is sold to a third party which means that a percentage of your home will be owned by someone else."
David summarises the key benefits and disadvantages of equity release as follows:
Homeowners receive a substantial sum of cash to spend or invest, as they are entering their retirement period.
In the case of the lifetime mortgage, ownership of the property is retained and homeowners can benefit from any subsequent rises in house prices.
With equity release schemes improving and the sale of schemes being regulated by the Financial Services Authority, many now contain a 'no negative equity guarantee' so that the homeowner's estate is not liable if the final debt exceeds the property value.
- With all schemes the money released is tax free.
Equity release schemes may charge high interest rates and set up charges.
Certain people who cash in on their house via an equity release scheme may suffer a loss of entitlement to means tested benefits.
These schemes can result in a reduction in the value of the homeowners estate meaning that there is less to pass on to beneficiaries.
The schemes can lead to increased amounts of debt.
There is a possibility that further amounts may not be borrowed on the property in the future
- Income tax may be payable on the income produced by the invested capital
David concludes: "It is always worth looking at all options available. Downsizing is a popular alternative to equity release and enables the homeowner to benefit fully from the investment they have made in their property.
"I would highly recommend that anyone considering easing the financial burden of retirement with an equity release scheme should seek impartial legal advice. Often financial advisors earn commission and fees and some can provide a biased opinion. With a decision that affects your future and that of your beneficiaries' it is worth getting independent objective advice to ensure you make the decision that is right for you."
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