Gardner Leader

Equity Release Schemes

However for those with equity in their property (and prices have risen phenomenally in the last fourteen years from an average house price in 1994 of £62,636 to today’s figure of £184,185) there is an opportunity to release that equity.

Equity release is defined as ‘the unlocking of some or all of the equity tied up in the property, without the owner having to move house or being able to demonstrate that the finance generated can be repaid out of income’.

At present there a two principal ways of releasing equity from property.

·         Home Reversion Schemes: selling the home or part of it

·         Lifetime Mortgages: taking out a mortgage secured on the home

The capital released will provide a lump sum, an income, or both. The income is usually generated through the purchase of a life annuity, which may form part of the scheme or be purchased independently.

The cash lump sum or a monthly cash release can be used to enable home improvements, provide additional income, supplement pension funds, repay existing debt, etc.

The market has developed in response to the social and economic problems faced by the elderly including the pension gap, failing health and the cost of care, and the deteriorating state of the property. More than 90% of the Lifetime Mortgage business is completed by members both of Safe Home Income Plans (SHIP) and the Council of Mortgage Lenders. This market is in the region of £1.2bn a year.

Equity release clients are typically elderly since the qualifying age is generally 60 and in order to obtain the more attractive packages the applicant needs to be even older than this. In addition to the elderly, the other main types of applicant are those who wish to enjoy a better lifestyle, and wealthy applicants who may be using equity release as a means of mitigating Inheritance Tax liability.

The most common type of equity release is a lifetime mortgage. There are many variations to this, but essentially the applicant raises a loan against the value of his home. The loan does not have to be repaid until the applicant dies, vacates the property or moves into long term care.

Lifetime mortgages can be interest only, where the applicant borrows a lump sum and pays monthly interest; or a roll up interest loan where the applicant borrows a lump sum, takes a monthly income, or both. In either case, the rate of interest can be fixed, variable or capped. In my opinion, schemes should only be considered if they provide a guarantee against no negative equity and carry no penalties on either death or as a result on moving into care.

I see the advantages of such schemes as follows:

• You get to stay in your home
• You release part of the value of your home without making any monthly payments
• There is no need to prove income to qualify
• Some plans are portable i.e. you can transfer the scheme to a new property.
• You can spend the money how you choose.
• You can usually borrow more later if you need to.
• The provider cannot repossess, even if the total amount of the loan exceeds the value of the property
• The loan can be discharged at any time (although usually this will incur a fee or penalty).

The disadvantages (and these are considerable) as I see it are:

• Some types of property are not suitable security
• Over the years the loan (plus compound interest) could grow to a substantial amount.
• Rates of interest are high and could be worrying for the elderly
• In a period of falling house prices the rate of interest could swallow up the entire equity
• It is not easy to predict the final cost of this type of loan
• If you already have a mortgage secured on the property this will have to be discharged first
• You may lose means tested State Benefits

It is therefore essential that, before considering any scheme, you take advice from both an Independent Financial Adviser and your solicitor.

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