Is Equity Release The Right Financial Option For You?

Equity release is a means by which homeowners over the age of 55 can raise money by releasing cash from their homes without having to leave home. The agreement gives you, and your spouse or partner, the right to remain living there until you both die or move out.

In recent years equity release has become an important part of retirement planning due to the adverse worldwide economic conditions which have badly affected the investments in their pension funds. Also, extremely low interest rates have meant that their savings are not generating sufficient income to provide a comfortable retirement.

If you're retired and are heavily relying on your savings to boost your pension, then you'll be struggling to make ends meet. And to make things worse, rising inflation is pushing your cost of living higher.

Equity release loans may not be the right option to solve your financial problems. The value of future inheritances is likely to be reduced due to the repayment of the loan and the accumulated accrued interests which is repayable from the proceeds of the sale of your property.

Involve other members of your family about your financial situation and your plan to apply for equity release. They may be able to explain the implications of such schemes and perhaps suggest other alternatives of raising funds for you. Only use equity release loans as a last resort as they are very expensive to maintain.

What are the alternatives to equity release?

There may be several alternatives available to you:

• Borrow the money you need from your family or bank.


• Sell your property and buy a smaller and cheaper property. You can then use the surplus proceeds to finance the project you have in mind.


• Realise you other assets, if any, such as stocks and shares, antique furniture, paintings, etc


• Recover your debts from family and friends.

Will equity release loans affect your benefits?

If you're claiming benefits, any income or lump sum payment you receive from the scheme could affect any means tested state benefits you're entitled to.

If after discussion with your family members you decide to use this form of loan, you should seek the advice of an independent financial advisor who will guide you through the application process. They will help you find the right Safe Home Income Plan (SHIP) approved schemes.

Features of SHIP approved shemes

A SHIP approved scheme will include the following:

• if you wish, you are allowed to remain in your property for the rest of your life as long as the property is your main home


• you can move to a suitable alternative property without penalty. However, if you move to a cheaper property, you may be required to repay a part of the loan to reflect the proportion of the loan to the cheaper property.


• you get a no-negative equity guarantee (i.e. you can't owe more than the value of your property where there is a fall in property values). This is to ensure that your children will never inherit a debt.


• you will be required to appoint your own solicitor who must certify that they have explained to you the terms and conditions of the equity release loan before the money is released by the provider.


• as long as you keep to the scheme rules, you are guaranteed that you cannot loose your home

There are two main types of equity release schemes:

• Lifetime mortgages - you can release between 18% and 50% of the current value of your property which you use as a collateral for the mortgage. You then receive a tax-free lump sum payment. The loan and interest is repaid from the proceeds from the sale of your home after your death or if you move into long term care.

  With drawdown lifetime mortgages, instead of taking a tax-free lump sum payment, you can take the mortgage in stages as and when you need it.



• Home reversion plans - With home reversion plans you can sell all or a percentage of your home to a reversion company. You will receive a lump sum payment and are allowed to remain in the property for the rest of your life.

  Let's say that you decide to sell 50% of your home to the reversion company. You are allowed to stay in the property rent-free for the rest of your life as a tenant. Under the terms of the home reversion plans, the reversion company gets 50% of the value of the property when it is sold after your death (including 50% of the increase in the value of the property) and the remaining half of the sale proceeds goes to your estate for your beneficiaries.

Equity release is a huge step to take and it can be complicated. Consider whether there are alternatives to this form of financing. It is prudent to take independent specialist advise before you proceed.

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