Unlocking Your Equity – the Choices
There is a bewildering variety of equity release schemes on the market and, judging by the letters pages of the financial press, they are not well understood. Releasing equity in a house can be an effective way of supplementing your income or releasing spare capital that will not be needed for your children. Each type of scheme has its advantages and disadvantages and choosing the most appropriate one (or indeed, deciding whether to set up such an arrangement in the first place) should only be done after considering the options carefully and taking professional advice.
Here is a brief summary of the main types of scheme being offered:
Home Income Plans
This is really a fancy title for a mortgage-based annuity. The principle is that a mortgage is taken on the property and the lump sum is used to buy an annuity or invested to provide an income which is used in part to pay the interest on the mortgage. The mortgage reduces the value of your estate for Inheritance Tax purposes. However, for most purchasers of these schemes the net increase in income is rather low, as most of the income generated goes to paying the additional mortgage interest. These are most suitable for quite elderly people with a reasonable amount of free equity in their properties.
With these plans, a lump sum is withdrawn and the interest payable on it 'rolls up' during the rest of your lifetime. The amount to be repaid will be an unpredictable proportion of the total value of the house and will depend on both the future movement in house prices and the prevailing interest rates (unless fixed at the outset). Because of the risk involved, Roll-up Plans are seldom used to advance more than half of the equity value in a house. Some schemes permit the maximum liability under the roll-up to be limited by reference to a percentage of the ultimate value of the house. The big plus point is that there are no repayments during your lifetime.
Home Reversion Plans
Under these schemes, your house is sold to the lender at a discount to current market value and you are then given the right to remain in the house for life. These schemes can be set up so that a fixed proportion of the value of the house is sold, not 100 per cent. There are no capital or interest payments.
These schemes operate in quite different ways and have quite different financial and tax implications. In the present economic climate, finding a suitable scheme can be difficult and in many cases a family arrangement can achieve the same effect with less anxiety and at a lower or comparable cost. In addition, the termination clauses need to be carefully considered, as in some cases a change of circumstances – such as needing to sell the house in order to move into a care home – can lead to significant financial penalties. If you are considering such a strategy, we can help you make sure you make the right decision.