Equity Release - Considering the implications
With the continuing rise in the cost of living and the value of property the concept of equity release is increasingly considered by a large section of the population.
Elderly people have often been regarded as the target market but with the anticipated deficit in government pensions and the apparent lack of adequate retirement planning the next generation should be equipped to consider the inherent risks.
You can release the equity in your home to give yourself a lump sum or a regular income (or both). There are two ways of releasing the equity in your property:
1. Arranging a Lifetime Mortgage designed to run for the rest of your life.
- A lump sum is paid to you by a lender
- The mortgage is registered against your property
- You continue to own your home
- The mortgage is repaid to the lender when the property is sold
- Anything left over passes to your estate
Or
2. Selling your home or part of it to a Home Reversion Scheme.
- You sell your home or part of it to a Home Reversion company
- The Home Reversion company pays you a lump sum or regular payments for your property
- You are allowed to live there for the rest of your life
- After you die (or move out for whatever reason) the home or that proportion that you sold belongs to the Home Reversion company
Either lending arrangement should be analysed from both a financial and legal perspective.
The following factors should be carefully considered:
- Retaining full home ownership
The ability to retain full home ownership and to move house with or without repaying the life time mortgage.
- Continued occupancy of the property
The ability to continue to occupy the property for as long as an individual may wish to do so.
- Eligibility for social security benefits
The affect on eligibility for social security benefits and the potential impact on an individual's tax position.
- No negative equity guarantee
The effectiveness of a 'no negative equity guarantee' and the risk of eroding all equity in the property.
- The level of capital released
The suitability of the level of capital released in view of the future needs of the individual and the percentage of the value of the property that this reflects.
- Consultation with family members/beneficiaries
Consultation with family members/beneficiaries in view of the certain reduction of assets and estate on death.
- Understanding the terms and conditions
Understanding the terms and conditions of the life time mortgage and the lender's ability and right to take action to repossess the property in circumstances which may include:
- The property falling into disrepair
- The non-repayment of the lifetime mortgage within 12 months of leaving the home due to death or long term care needs
- The non-occupation of the property for a continuous period of 6 calendar months without prior agreement but not due to long-term care requirements
- Bankruptcy or the entering of a voluntary arrangement with creditors
- The appointment of a receiver/deputy
- The property is made the subject of a Compulsory Purchase Order
The ability to repay the lifetime mortgage due to a change of personal circumstances (e.g. separation, divorce or inheritance) also needs to be taken into account.
It is essential that those who are considering an equity release scheme take professional legal advice on the immediate and future implications of the arrangement in view of the far reaching impact on the individual and family members.
