What is the typical process?
- Decide if Equity Release is the right solution for you.
- Decide if you want a lifetime mortgage or a home reversion plan.
- Decide if you want a lump sum, income or both.
- Decide if you want to take the full amount now or take it as and when you need it.
- Talk to your family.
- If you receive State benefits check with the benefits agency to see if the type of plan you are considering will affect your eligibility for these benefits.
- If you need money for home improvements, you may be eligible to raise the funds via a local authority grant instead.
- Consult an Independent Financial Adviser to research the most suitable recommendation for your needs and circumstances.
- Appoint an Independent legal adviser.
- An independent valuation will be carried out on your property.
- Your solicitor will ensure and confirm you fully understand the terms of the plan. Legal documents are then completed.
- The plan is now complete, and the money paid via your solicitor.
How does compound interest work on a lifetime mortgage?
As you do not repay anything until the end of the loan, interest is added to the amount owed. You will therefore start to pay interest on this as well. As a result the total amount you owe will grow more quickly than it would with a loan where you are paying off interest during the life of the loan, as shown in the graph below.
Life expectancy is an important consideration when thinking about taking out a Lifetime mortgage plan. The accumulation of interest over what could turn out to be a significant length of time will affect the value of any inheritance you leave behind when you eventually die. It is possible that this may be reduced to nothing and so it is important that you discuss the implications of a Lifetime mortgage plan with your family.
Will I be able to live in my home for the rest of my life?
All schemes should guarantee that you, and your partner, will be able to continue living in your home for the rest of your lives. If you would not get this guarantee, we would not recommend that you took out the scheme.
Will I be able to move home in the future?
If you want to be free to move home in the future, choose a scheme that clearly offers this option. Check whether any scheme you are interested in allows you to move, and to ‘transfer’ the scheme to your new property.
With a mortgage scheme, if you decide to sell your present home and move to one that is worth less, you may have to use part of the proceeds of the same to pay off part of the mortgage you raised against the value of your home. If your scheme demands this, check what the effect on your financial situation would be. Make sure that the interest rate remains unchanged after the move.
You should also check if there would be any penalty if you wanted to end the scheme before your death – for example if you sold up completely to move into a care home or rented sheltered housing.
What if I change my mind after taking out a scheme?
It will usually take at least two or three months to consider and decide on a scheme, including getting quotations and offers and preparation of the legal documents. You will have all this time to change your mind before you commit yourself, and you should carefully weigh up all the advantages and disadvantages before making a final decision.
If you think that you may want to cancel an equity release scheme in the future (for example, if you are expecting to receive an inheritance in a few years time) it is advisable to take out a lifetime mortgage rather than a reversion scheme. You can usually pay off a mortgage scheme early, although you should check if there are any penalty charges.
Reversion schemes, however, can’t be cancelled.
Are equity release schemes regulated?
The Financial Services Authority (FSA) regulates Lifetime Mortgages and Home Reversion Schemes.
If you decided to invest the money you get from an equity release scheme in an annuity then the company involved will be regulated by the FSA.
Many of the best-known companies offering equity release schemes sign up to the SHIP Code of Practice . SHIP stands for ‘Safe Home Income Plans’, but the code of practice covers many different type of equity release schemes, not just the mortgage-based home income plans.
SHIP members agree to follow a voluntary code of practice, undertaking to provide a fair, safe and complete presentation of their schemes to potential clients. SHIP members provide a certificate which has to be signed by the client’s solicitor before a scheme can be taken out.
Are there any costs involved in taking out a scheme?
Yes. There will be solicitor’s fees, the costs of having your home valued by a surveyor and possibly also an administration fee charged by the company organising the scheme.
Make sure that all costs are clearly stated and that you understand exactly what you are paying for.
For our advice we can charge a fee of typically £595 paid on completion and we receive commission from the lender.
What happens if property prices change?
With a lifetime mortgage, such as a home income plan, any changes in property prices can affect the amount you eventually leave to your heirs. If property prices rise, your home will be worth more when it comes to be sold, so your heirs will gain the full benefit of any remaining equity after the mortgage, and any remaining interest, had been paid off.
If property prices fall and your home is worth less, your heirs will inherit a smaller sum after the mortgage has been paid off. If the value of your home falls substantially and is worth less than the mortgage taken out, there may be nothing left for your heirs to inherit. However, they will not be liable for any shortfall.
If you choose a reversion scheme and sell all of your house, then only the company that bought your house will be affected by changes in property prices. If you sell part of your house and its value alters, both the company that bought the house and your heirs will be jointly affected.
Make sure that the effect of changes in property prices is clearly stated and that you understand what can happen before you commit yourself to any scheme.
Who pays for repairs to the house?
You are responsible for any repairs and maintenance, regardless of which scheme you choose. You also still have to pay all your usual bills, such as Council Tax, electricity bills, insurance and so on.
What happens if someone moves in with me after I take out a scheme?
Anyone who moves in with you after you take out a scheme – whether a relative, friend or a new husband or wife – may not be able to stay in the property after your death. This is because the scheme would come to an end, and the property would have to be sold.
If there is a chance that a new partner may be moving into your home, talk to any potential scheme provider about the implications. It might be possible to transfer a scheme into your joint names, although this might not be an option if your new partner is under the aged of 60 when they move in. In this situation, your partner would not be able to remain in the home after your death.
What happens to the house when I die?
If you sold part of your house under a reversion scheme or if you have taken out a lifetime mortgage, the executor of your estate should normally be responsible for the sale. However, if you have sold all of your house under a reversion scheme, then the company that purchased it will sell your house after your death. You may be asked to make a will to make matters clear.
What happens if I need more money in future?
Some schemes will allow you to mortgage or sell a further portion of your home at some time in the future. If you think that you may want to do this, we will help you check that the scheme you are considering offers you this option.
Points to consider before going ahead
1. Before deciding to take out any sort of equity release scheme, it is important to think about whether this is really your best option. There may be other ways of raising additional money, or addressing your housing problems.
2. If you are thinking about taking out a scheme because you are struggling on a low income, have you made sure you are getting all the welfare benefits you are entitled to? Many older people are entitled to benefits such as Pension Credit or Council Tax Benefit, but do not currently claim them. Or you may be entitled to a disability benefit such as Attendance Allowance.
3. If you are in debt, get advice on how to manage this problem before even considering taking out any sort of equity release scheme. You can get advice on managing debt from your local Citizens Advice Bureau.
4. If you want to raise a lump sum to help pay for repairs to your home, first find out whether you are entitled to a house renovation grant from the council.
5. Does your current home really meet your needs? It could be worth thinking about selling your home and buying something smaller, or perhaps you might consider retirement or sheltered accommodation.
6. If you have considered all of these issues there are still a couple of factors to take into account before going ahead with an equity release scheme.
7. If you are currently receiving any of the ‘income-related’ social security benefits, such as Pension Credit or Council Tax Benefit, you should think carefully before taking out any equity release scheme . Any cash lump sum or additional income you receive when you take out a scheme, could mean that you are no longer entitled to these benefits. Before taking out a scheme, you will need to weigh up any losses against the benefit of the extra income that you could be getting, now and in the foreseeable future.
All schemes reduce the inheritance you can leave to your heirs. It is often a good idea to discuss your intentions with your family, so that everyone is clear about the implications and misunderstandings are avoided. However, the decision on whether or not to go ahead is ultimately up to you.