Essex Homeowners over the age of 65 can use equity release plans to get money from the value of their home without having to sell it and move. There are two main kinds of schemes: lifetime mortgages and reversion schemes. If you decide to go this route, one of the decisions you will have to make is which one to choose.
It’s important to get help, both financially and legally. Taking money out of your home could affect many parts of your finances, from whether you can get means-tested benefits to how much your estate is worth when you die. You need to make sure you know and plan for any bad effects equity release could have on your finances.
Equity Release Schemes – The Basics
With equity release schemes, you can get cash from the equity you’ve built up in your home. They are made for older homeowners who would have trouble getting a regular mortgage and probably don’t make enough money to make regular payments. Most lifetime mortgages have a minimum age of 55, and most reversion plans have a minimum age of 60.
The most common type of scheme is a mortgage that lasts for life. You can get a loan against your property in exchange for a lump sum, an income, or a mix of the two. You still have ownership of the land. Most of the time, you won’t have to pay back the loan every month. Instead, the debt will be paid off when you die or go into long-term care. Since you don’t make payments every month, the interest “rolls up,” and the amount you owe will go up quickly as a result. Money Advice Service numbers show that a $£45,000 loan with a 5% interest rate will be worth £57,433 after five years and £93,552 after 15 years. If you take out the loan and live for 25 years, you will have to pay back £152,387.
The most common type of lifetime mortgage is the “drawdown” type, which is made for people who don’t need a big lump sum of cash right away. Instead, you are given a pot of money that you can use when you need it. You only pay interest on the money you withdraw, which could save you a lot of cash.
Home reversion programmes make up a very small portion of the market. With these, you sell all or part of your home to a company in exchange for a lump sum or regular income and the right to keep living there. When the property is sold, you or your estate will only get the amount of its value that you still own. If, for example, you sell 60%, you will only keep 40% of the final sale price.
Fees for the plans vary, but setting up an equity release plan will probably cost you around £1,500, plus any fees you have to pay your financial adviser.
How much can you borrow?
How much you can get from equity release depends on a number of things, like how much your home is worth and how old you are. If two people sign up for the plan together, it will be based on the age of the younger person.
On a lifetime mortgage, the most you can borrow is usually around 50% of the value of the property, but younger borrowers will have their loans capped at much less than that. On a reversion plan, you can sometimes sell up to 100% of your share in the property. How much you get for that share depends on how old you are. More will be given to you as you get older.
How safe are the plans?
The Financial Services Authority in the UK is in charge of regulating lifetime mortgages and home reversion plans.
If you choose one from a member of the Equity Release Council, it will have a “no negative equity guarantee,” which says that customers “will never owe more than their home is worth, and no debt will ever be left to the estate.”
Equity Release Schemes – The Alternatives
Before you really think about equity release, you should think about what other options you have. Have you applied for all of the state benefits you are eligible for? Have you thought about using other savings or assets? Have you considered renting out a room in your home? If you are less mobile and need money to make changes to your home, you might be able to get help. Your local government might be able to point you in the right direction. For many people, moving to a smaller home will be the best way to free up equity.
If you plan to spend the money, getting an equity release plan will lower the value of what you leave your family, so you might want to talk to them about it. You might even want to give them the equity to help them out, but make sure that’s what they want.
We are based in Essex and cover the whole county and surrounding areas.
For more information on Equity Release in Essex please give us a call on 01277 620083.