Several clients find that their wealth is tied up in a property that has appreciated in value substantially. But often their income from pensions or other investments haven’t had the same level of growth. Many people have the desire to turn the value in their property into a lump sum, an income stream or even both. In these cases, Equity Release may be the answer.
Before discussing Equity Release in more detail, we recommend you take independent financial advice. This is to ensure there’s a scheme that is suitable for you.
Equity Release has received bad press in the past and can be legally and financially complex. At Burtons, we can undertake all the necessary legal work needed for you, however we cannot advise you as to whether a particular scheme is suitable for your financial situation.
If Equity Release is of interest, please consider taking advice from an independent financial adviser with experience in the field.
The basics of Equity Release
Usually there are eligibility issues, some of which will be down to each individual financial provider. However some of the basics are:
- that you will usually have to be over 55 years of age,
- own your own home,
- that home will need to have a minimum value and will usually need to be of a traditional construct.
For example if you live in a park home then you are unlikely to be able to obtain an Equity Release.
There are other factors for the financial provider to consider, some of which include:
- whether to nor the property is a freehold or leasehold title (freehold tends to be preferred),
- any existing mortgage on the property and there will be a minimum and maximum amount that can be borrowed (or sold).
This is where your independent financial adviser will be able to provide further information.
Schemes
Whilst often going by different names, there are essentially three schemes available:
- lifetime mortgage
- home reversion plans
- sale and rent back
We shall summarise each in turn:
Lifetime Mortgage
In its simplest form this is a mortgage that is usually repayable when the applicant dies, goes into long-term care or leaves the house. The applicant borrows against the value of the house to produce a lump sum. They can utilise the lump sum as they wish. Variations of this scheme do happen as new products become available, and others are withdrawn from the market. It’s best you discuss what is available to you with an independent financial adviser.
Some types of this product are known as:
- Roll-up Loans
- Flexible Drawdown Mortgages
- Flexible Payment Mortgages
- Fixed Charge Mortgages
- Home Income Plans
Home Reversion Plans
These schemes tend to involve the applicant selling a percentage of their house to the loan provider. They receive either a lump sum or an income in return together with the right to live in the property as a tenant paying a nominal amount of rent. When the property is sold, the loan provider takes their percentage share of the proceeds of sale. This includes a proportionate part of any increase in value since the loan was provided.
The amount you can borrow under this scheme will depend on:
- age,
- the value of the house and
- the loan providers individual qualification factors.
The two main outcomes for this are either a lump sum of money or an income.
Sale and Rent Back
These types of schemes are not true Equity Release and are aimed more at the market of people who are in danger of losing their home, these are the schemes that received so much bad press previously but can still be of use. Under these schemes the loan provider purchases the property from the applicant at a large discount and then the property is rented back to the applicant at market rent. The money released is then available for the applicant to use in settling any outstanding mortgage on the property.
Some schemes allow for a buy back of the property at a later date.
One of the dangers with this scheme for the applicant is that they will only occupy the property as a tenant and have little security. After six months they could be required to leave the property or they could find themselves in danger of not being able to afford the rent; which is often greater than their original mortgage amount.
Advantages and disadvantages
All schemes carry advantages and disadvantages and it will be up to the applicant to decide whether any scheme is suitable for them. Taking out Equity Release can be a big decision and we again reiterate that you should obtain independent financial advice as to whether a scheme is suitable for you before undertaking the process.
Equity Release with Burtons
If you would like to know about the legal process involved in Equity Release or are considering undertaking the same and would like a quote or to instruct us, then please contact our Equity Release Team on 01892 824 577 or by completing our online contact form here.
