This is a way of releasing money tied up in the bricks and mortar of your home. You take out a loan secured on the value of the property.
You are able to borrow money based upon the value of your home or the amount of equity in it. In the future this money has to be paid back plus interest. If you are on state benefits taking equity release could have an effect on them.
Benefit 1. You do not have to move out of the home and you receive the money you need.
There are two main types of equity release scheme: Lifetime mortgage and Home reversion.
LIFETIME MORTGAGE
This allows you to take out a loan, secured against the value of your home. But you keep ownership of the property. Lifetime mortgages can be taken out on an individual basis, or jointly with a spouse or partner. The total debt (loan and interest) is not repaid until you move out of the home for good (you move into long term care) or after the death of joint parties.
Benefit 2. You keep full ownership of the property and You do not make any repayments during the life of the loan.
If you enter into this type of contract, make sure you the company offers a 'No Negative Equity Guarantee.' This guarantees that the maximum you or your estate has to repay will not exceed the value of the sale price of the property.
Benefit 3. The total debt is recovered by the equity release company, on the sale of the property.
Tip: Ensure selling costs of the property are included within the lifetime mortgage contract and are not deducted from your estate.
There are two types of loan available: A single lump sum or a series of smaller sums over a period of time. Unfortunately, depending on what the money is to be used for, taxation may be payable on any investments/investment gains you make with the borrowed money.
Benefit 4. You have a choice and can borrow a single (one off) lump sum or a series of smaller sums over a period of time.
You must consider the way interest is charged on any loan you take. For example, taking a series of smaller loans, may attract a higher interest charge than a single (one off) lump sum. The amount to be paid back when you take a series of smaller loans will be a lot higher than expected. The result of this would be a smaller sum of money available, to be added to your estate when the property is eventually sold.
HOME REVERSION SCHEME
You sell either all or part of your home but retain the right to live there. You no longer own your home with this type of scheme, or may only own a portion of it. This will depend upon the type of loan you take out. You receive a lease allowing you to live there but you may also be required to pay a small rent.
If you sold 100 percent of your home then any increase in equity the property experiences, will benefit the equity release company only and not your estate. If you sold only a part of the property, then the reversion company takes a percentage of the sale proceeds.
Benefit 5. Lump sums of money obtained from the sale of your own home are not taxable.
A reversion scheme can be taken out individually or jointly, in which case it continues until the death of the second person. This type of scheme can be set up to pay a single lump sum or a series of smaller payments.
The home reversion company will be repaid on the sale of the property. This will occur when you leave the property for good.
RESTRICTIONS
The restrictions on taking out a Lifetime mortgage or Home reversion are:
• Age: depending on the company may require a minimum of 55 to 65 years of age
• Minimum market value/equity value
• Mortgage: you may be expected to pay off any mortgage you have with a portion of the borrowed money.
• Minimum property standard/condition
• Charges: There will be costs associated with setting up these schemes
Costs will vary, from arrangement fees, valuation fees, solicitors fees and possibly early repayment charges and possibly more.
Tip: Costs must be considered and factored in, before any decision is made to take out one of these schemes.
Tip: The amount you can borrow is dependent upon your age. Typically, the older you are the more money you can borrow. However it is highly unlikely to equal the total amount of equity in the property.
Edwin Cleever is an authority on making money in retirement and the financial markets. To get a FREE report on alternative methods to make money, go to http://www.howtoretirewithmoney.com
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