Should you involve family members when considering Equity Release.
We always advise our clients to bring family members into the conversation as it may effect the amount of money left as part of an estate when someone dies.
First of all, what is equity release?Essentially, equity release allows you to unlock the value of your property, without having to move home. It can provide a lump sum or a regular income, or both. The release of money can be used in any number of ways and to decrease the value of your estate for inheritance tax purposes.
Who should consider equity release?
Equity release is for people over 55, who own a property and have either paid off their mortgage or a substantial part of it.
The two types of equity release?
Lifetime mortgages allow people to borrow against the value of their property.
Home reversion plans require the sale of all or part of the property to realise a lump sum or income, but the borrower retains the right to live in the property rent-free until death.However here at Michael Usher Mortgage Services we do not offer Home Reversion plans. A decision made by the owner.
What happens if I die or want to move?
If you live in the property until you die, the money from its sale is used to pay the lender — any equity left over is then paid to your beneficiaries.
We would suggest that you bring your family into the discussion, so that they fully understand the implications of equity release.
What happens when you sell the property before you die depends on the equity release scheme: for lifetime mortgages, you must repay the money you borrowed.
There are two main types of lifetime mortgage:
1. Interest-only mortgages
Here, borrowers receive a lump sum secured against the value of their property. They pay monthly interest on the loan and can pay it off if ever they decide to sell the property.
The interest rate may be fixed or variable. But if it is variable, and the borrower’s pension or other source of income is fixed, they will find it more difficult to meet their repayments if interest rates rise.
To avoid this problem, most borrowers invest the money they borrow, often in an income annuity. They use the income to pay the interest on the loan, and what is left over is theirs to spend. But because annuity rates are low and depend on your age, this type of loan is really only suitable for very elderly property owners.
2. Rolled-up interest loans
With this loan, a lender provides a lump sum or a monthly income (or both), based on the value of a borrower’s home. Nothing is repaid until the borrower dies or the property is sold, but annual interest is added to the amount borrowed. This is ‘rolled up’ over the life of the loan.
The value of a borrower’s home and their age will determine how much they can borrow. The older they are, the greater the percentage of their home’s value they can borrow.
As above, the interest rate on the loan may be fixed or variable. If it is variable, it could also be capped, which means it cannot go above a certain level.
Sometimes property loses value during the loan period. Most lenders offer a ‘no negative equity’ guarantee to cover this situation. This means that the amount a borrower pays back to the lender will never be more than the value of their home.
There are some pros and cons to consider
- Equity release may mean your loved ones inherit less.
- It could lead to your family home being sold. This may be a particular issue if the property has been held in the family for generations.
- Equity release may affect your current or future means-tested benefits
- A lump sum may allow you to pay off debts, pay for a holiday or for home improvements.
- Extra income may simply allow you to live more comfortably, rather than constantly worrying about making ends meet.
- Extra money could also mean you finally get to fulfill life-long ambitions.
- You could use a lump sum to help loved ones pay for a deposit on a house.
- Equity release can also be used to pay for care bills without having to sell up.
- Equity may have certain tax advantages.
At then end of the day equity release may not be for you and there are alternatives that out advisers can discuss with you. All our advisers are members of the Equity Release Council and they have to stick to the guidelines on giving advice. We are authorised and regulated by the Financial Conduct Authority.