Equity Release considerationsPosted on: 16 July 2012 by Gareth Hargreaves
Expert advice on what to consider if you're contemplating releasing the value of your home with an equity release scheme.
A lifetime mortgage could leave little for your family so explore all the options before taking the plunge.
Danny Cox CFP, Chartered Financial Planner, Hargreaves Lansdown:
Equity release involves spending part of the value of the family home. This can work very well and means that you can spend some of the growth in the value of your home without needing to move and downsize. The money released can often be organised to a tax efficient way and in some cases will reduce the amount of inheritance tax that might be payable on your estate.
The downside with equity release is that you are spending part of the value of your home. This means less money available for your beneficiaries and less value for you to spend or release if you were to downsize later. For these reasons I see equity release as being last on the shopping list, look at other methods of generating income first. And ideally you should consult with your family and beneficiaries so they understand what you are considering.
There are two main types of equity release scheme, Lifetime Mortgages, where you borrow against the value of your property and Home Reversion, where you sell part of your property but retain the right to live there until death. Look out for schemes that are members of SHIP the Safe Home Income Plan.
Members of SHIP have to abide by their code of conduct and schemes have to conform to the following criteria:
- The right to live in the property for life
- Freedom to move to an alternative property without financial penalties
- Options to receive a cash sum or regular income payments
- No negative equity guarantee
Kevin Tooze, IFA, Equity Partners UK Ltd:
Equity release could mean that upon death there is very little if not nil value left in your property for any chosen beneficiaries. Also at your current age you do not qualify for the highest percentage of borrowing.
As you have paid off your mortgage I would concentrate on building pension and tax free investments such as ISAs between now and you normal retirement date.
Equity release can be perfect for certain individuals but a thorough understanding of your circumstances would be required before appropriate advice can be provided. As ever a face to face meeting with an IFA will prove invaluable and outline the pitfalls and advantages to you.
Tony Catt, Independent Financial Adviser:
First of all, you need to look at your overall financial circumstances. Are you receiving any kind of benefits, possibly means tested, that would be affected by producing income or a lump sum? How much money would be useful to you? What are you going to do with that money? Depending on the answers to those questions, you would then look to find a Lifetime Mortgage that has the facilities you require? Do you need all of the money at the outset? If not, you need a scheme that has a drawdown facility. You then need to consider the fees to get into the scheme and the ongoing interest rate for the scheme.
You need to consider whether you are looking to leave any money to your family when you die. Your family may need to be involved in the decision-making process.
Most Lifetime Mortgage providers are members of SHIP. This provides a code of practice that ensures as far as possible that the terms of any scheme are fair.
There is a lot to think about and you should get the help of a qualified IFA to help you through the whole process.
I hope that this helps.
Peter McGahan, Managing Director, Worldwide Financial Planning:
Before considering equity release or a lifetime mortgage decide whether or not you actually need the money. Ensure you consider all grants available and that you also understand the impact that releasing equity will have on any benefits you may have. Consider whether trading down in property size is a good idea. Always use an Independent Financial Adviser and a solicitor for your transaction. At my last check, the rate difference was 27 per cent between the best and the worst offerings. Always use a SHIP registered organisation for all the safety it offers you.
The scheme is there to protect you from poor offerings. They guarantee a no negative equity guarantee - so you will never owe more than the value of your home. The members of SHIP agree to provide a fair, simple and complete presentation of their plans. The benefits, obligations, variables and limitations must be clearly set out in their literature, including all costs which the applicant has to bear in setting up the scheme as well as the position on moving, the tax situation and the effect of changes in house values.
I recommend you also discuss any plans to take out a lifetime mortgage with your family as it may affect their inheritance and it's best to be clear about this in advance.
Make sure you have the freedom to move to another property if needs be at a later stage.
Some plans are still being sold with standard variable rates. Be careful with these in difficult market conditions.
Another option to consider is to sell your house to your children. They could pay a discounted price in return for you not paying rent for a few years. The capital you have could be invested and you could strip off the income. On death the value of your investments could be left in trust to your children who would have the money they need to repay the mortgage.
Donna Bradshaw, Financial Planning Strategist, IFG Group Plc:
Equity release may or may not be suitable, it really depends on your circumstances and prevailing market conditions at that time. There are pros and cons to doing it and it is vital that you take independent advice, closer to the time of your retirement, to discuss these, look at your personal circumstances in depth and what other options are available.
Safe Home Income Plans: www.ship-ltd.org
Danny Cox CFP
Telephone: 01277 848 666
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