Many people have at least a vague idea of what is meant by equity release plans. These vague ideas are often coloured by the negative publicity that has in the past sometimes surrounded the plans or by entirely understandable fears that releasing equity is akin to signing away what is usually an individual’s most valuable asset: bricks and mortar property.
Concerned relatives may have weighed in, worried about how equity release might impact on paying for nursing care in later life or about what would happen to any beneficiaries under the equity releaser’s will. It is no wonder that equity release as a viable and flexible means of subsidising retirement costs took a while to bed in to the collective consciousness.
Of course, the careful regulatory framework surrounding the industry has undoubtedly helped, but so too has the burgeoning variety of equity release plans in today’s marketplace. With more people than ever, especially among the over-55s, now choosing to release equity, more providers have come onto the market. The increased competition has benefited consumers, giving them real and valid choices in the type of plans they select.
In the earlier stages of the equity release market, most plans tended towards the basic roll-up lifetime mortgage. Nowadays, there are considerably more options – and thankfully, also, diligent providers that take care and time to ensure potential plan buyers choose a plan where the results match their expectations.
This flexible format for equity release schemes remains the most popular way of releasing equity. As the name suggests, a lifetime mortgage amounts to a loan secured against the property. The plan-holder receives a lump sum, which is tax-free and theirs to spend at their discretion. There is also usually no need to worry about monthly repayments, because the loan plus the accrued interest is not repayable until the property is sold. This tends not to be until either the homeowner and their partner die or enter long-term nursing or residential care.
Some people worry that a lifetime mortgage will impact on their ability to move, or downsize – and there is a certain amount of truth to this. However, the concern hides two facts: first, it is entirely possible, and almost always recommended, not to take out a lifetime mortgage until you are in the home that you do not anticipate moving from. Secondly, taking out a lifetime mortgage can actually facilitate an individual’s ability to stay in their home by freeing up capital to pay for cleaners, gardeners, nursing assistance or whatever else proves necessary. Most lifetime mortgages are for between 18% and 50% of the property’s value, with the precise amount depending on the plan-holder’s age.
Drawdown lifetime mortgages operate in a similar way to lifetime mortgages, but are designed to assist the plan-holder with dealing with unexpected expenditure. Choosing to release equity in this way means that rather than taking their money in a single lump sum, a plan-holder can draw it down in stages. As well as taking some of the worry away from unforeseen expenses, it also means that the plan-holder does not have to consider how best to hold or invest the entire sum. A final advantage, which is definitely not to be sniffed at, is that interest is applied only on the money drawn down. This technicality can vastly reduce the cost to the plan-holder.
Individuals with specific medical needs may worry that equity release is not suited to them. However, enhanced lifetime mortgage plans have been designed with such people very much in mind. Plan-holders can release higher sums than those on mainstream lifetime mortgages, and the resulting rates may also be more advantageous. The range of conditions that may qualify someone for an enhanced lifetime mortgage plan is wide, and may include smokers, as well as those with diagnosed issues such as diabetes.
With rising property and higher education costs being what they are, many people are more concerned than ever to leave their loved ones an inheritance. Equity release plans are often seen as mitigating against this wish, but newer products have now come onto the market designed to ensure the plan-holder can guarantee an inheritance. Not all lifetime mortgages offer this facility but of those that do, they manage it by permitting the plan-holder to ring-fence a certain percentage of the property’s value.
Other people worry about the interest that accrues with a lifetime mortgage. Some policies now permit plan-holders to make regular interest payments, thus reducing the overall interest owed at the end of the loan’s lifetime. A further category of lifetime mortgages allows the plan-holder to make flexible monthly interest payments.
Home Reversion Plans
These are far less common than lifetime mortgages. Whereas with a lifetime mortgage, the plan-holder retains full ownership of their property, with a home reversion plan, the homeowner sells all or part of the property to the reversion plan company. The plan-holder may then stay in the property for as long as they wish. They will benefit from any future rise to the property’s value only if they have sold less than 100% of the property’s value at the time of taking out the plan.