Is equity release right for me?
IN my 30 years in financial planning, I've loathed the word ‘equity' as a term when relating to property, as I often saw it used as an excuse for people to be sold into debt. In my view, it's your home.
But equity release has soared in popularity for many justifiable reasons, so I'll guide you through some pitfalls to make the best of your home and the security it gives you.
The equity release market in the UK is much lower than the US at just £2.15 billion, but the drivers for the market are plain to see. Our population is facing many areas of financial pressure and indeed with inflation at one end and falling income at another, the disposable income is plummeting.
At retirement, many are still facing indebtedness with credit card debt as well as interest-only mortgages with no repayment vehicles in place, weighing heavily.
The UK has one of the largest pension gaps in the world at £25 trillion, and after adding to this the spiralling cost of long term care, it's easy to see how the home could be seen as the piggy bank to raid.
Equity release plans allow you to borrow against your home (you'll see I avoided the word release) either by a lump sum or as a regular income.
There are two main types: Lifetime mortgages and home reversion plans.
A lifetime mortgage lets you take a loan against the property and you still retain the ownership. You don't have to make any payments and the loan and any interest that rolls up is paid off on the sale of the property. If the property increases in value you will still benefit from that gain.
Versions of it allow you to borrow either a lump sum, draw down capital over time, make voluntary payments if you wish, or release enhanced amounts if you are medically unwell.
A home reversion plan allows you to sell on part, or all of your home, and have a cash sum in return. You are normally able to release larger amounts this way than via a lifetime mortgage and you are able to stay in your home rent free for the rest of your life or until you move into long term care.
There is no interest to pay on the capital you have borrowed and the home reversion company will simply take the percentage of the home they have as repayment and the rest will return to your estate.
Risks to consider: Be sure to take advice on the impact of any capital you ‘release' on areas such as benefits, tax or inheritance for example. There is no point increasing your income only to find its reduced elsewhere because of assessments on benefits.
Similarly, we have advised clients to look for grants to do the work they needed to do. Some grants are means tested and if you have already ‘released' the capital you mightn't be eligible for the grant which may have done the job in the first place.
Be sure to use a specialist independent financial adviser when looking or the best options so they will choose from every provider in the market, avoiding pitfalls such as high early redemption charges.
Know in advance that if you choose a home reversion scheme you would miss out on any house price increases on the percentage you have sold off. Some have been as high as 25 per cent of the amount borrowed – that's just criminal.
Alternatives to equity release are the obvious choices of using any surplus cash/investments you have stored up.
Consider selling or downsizing to a smaller property or even renting so you can use all the cash.
The obvious choice to a family who would lose out on the asset's future value if owned by a home reversion scheme, is to consider selling them.
You can never owe more than the value of you home as there is a negative equity guarantee.
:: Peter McGahan is the owner of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you would like advice on raising capital from your home, call Darren McKeever on 028 6863 2692, email firstname.lastname@example.org or visit www.wwfp.net.