Equity Release schemes have become increasingly popular with senior citizens in recent years, (there is invariably an age qualification of 55 or over). Their purpose is to release capital “locked up” in a house (often where the original mortgage has been paid off). The two main types of schemes are:
1. Lifetime Mortgage - the most popular these days. You receive a loan of up to a certain percentage of the value of your house (usually depending on the age when you apply). The loan is usually repaid on your death or if you go into a home or become subject to full time care or permanently cease residence in the property. The trigger to repay the loan only arises in the case of this happening to the second person if it is taken out by a couple. Interest builds up over the term of the loan and is compounded and therefore the sum eventually to be paid back (which could be many years later) is significantly higher than the sum actually taken out through the original loan.
2. Home Reversion Plan – less common now. Here you would transfer a share in the property to a company in return for a cash sum (usually this is much less than the market value of the percentage of the property being transferred). Usually a lease is granted for your life time to give security of occupation. When the property is eventually sold (again usually on death or on permanently vacating the property) the company receives from the sale proceeds a sum equivalent to its percentage ownership of the property and you or your children or beneficiaries the balance. There is no compounding interest to be added. This is a benefit of this particular option but many clients jib at the prospect of not retaining sole freehold ownership of their properties.
In both these schemes the advantage to the client is that he or she receives a lump sum and is not required to make any repayments during his or her lifetime – this is not just capital but also interest (this is where these schemes are distinct from an interest only mortgage which is the closest comparable with the Lifetime Mortgage) until he or she dies of quits the property. However, you should not forget that the lump sum received on the Lifetime Mortgage is not a gift but a loan and therefore does have to be repaid at some stage –usually after the death of the borrower. In most cases therefore this affects the children and/or beneficiaries of a deceased person and it has often been the complaints of the next generation (finding that their anticipated inheritance is severely reduced because of the somewhat inflated sum having to be paid back or the large chunk of the sale proceeds taken by the company on a Home Reversion Plan) which has led to some criticism of these schemes in recent years, some of which have been reported in the press.
Equity release is an attractive option particularly to older people seeking to use their homes to raise capital but it does have drawbacks and clients should always consider carefully other options such as down sizing by moving to a smaller, cheaper house to free up capital, seeking family assistance or using savings if specific expenditure is required. Most important of all it is vital to seek advice from an experienced and qualified financial adviser and most certainly, if you decide to go ahead in principle with an equity release scheme, from your legal adviser.
We at Stapletons, initially Geoff Rawding and, following his retirement, currently James Buxton (both of whom who are of an age to relate particularly to clients considering equity release options!), ably assisted from the start by Jean Flynn, have been carrying out this type of work for well over 10 years. Do contact us for practical and sympathetic advice and use the benefit of our considerable experience and expertise in equity release.
Contact James Buxton or Jean Flynn via our contacts link.
