More and more homeowners who are retired, or approaching retirement, are looking to discover the facts about equity release. There are many important issues to be considered before choosing an equity release mortgage, or lifetime mortgage. Using our wealth of experience in dealing with homeowners age 55+, here we discuss the 10 key considerations for consumers in considering whether equity release is the right option for them, or not.
Once your plan has completed, you will receive a cash advance, which will be tax-free upon receipt as this payment is classed as a withdrawal of capital, not income. Depending on how much equity you wish to retain, you may decide not to access all available funds in one go. To allow for this, some plans will permit further instalments to be released at a future date using a ‘drawdown lifetime mortgage’.
Although the payment upon receipt is tax-free, there could be future tax due depending on how that money is managed thereafter. For instance: -
- Any interest this amount attracts when placed into a savings/investment maybe due tax on the interest or dividends paid
- If this money is gifted to family, although perfectly feasible, you should always take advice for inheritance tax purposes due to the 7-year ‘tapering relief’ rule
- An indirect tax could be loss of means tested benefits, should the equity withdrawn, take you over any thresholds for benefit qualification rules
In all cases, when receiving independent equity release advice, your adviser MUST always point out any implications of taking a release of equity.
Use of equity release
Homeowners often ask whether there are any limitations on how the equity release funds can be spent, or used for. In essence, there are no restrictions placed on how the money can be spent, by the regulator, or by the lender themselves.
However, as best practice and as independent equity release advisers, we are there to protect the consumer and act on behalf of the lenders to ensure that best advice is being provided. We need to ensure the advice and recommendation we offer now, is also appropriate for the future of the homeowners concerned and their family.
There are many reasons why individuals, or couples might want to take a release of equity and discover all the facts about equity release. Following advice, they may wish to consider alterations or improvements to their homes, or future proof the property for their old age. Some may wish to help their children or other relatives with their own property purchase, while others may want to treat themselves to more regular holidays.
All these areas are commonplace and sensible as long as taken the right way, with the right plan & for the right amount. Where sometimes this may fail is using an inexperienced adviser, consumer providing misleading information, or simply not adhering to the advice of an equity release specialist.
No need to move
To achieve any of the above, most people would need to downsize and move to a smaller property, with all the potential issues that entails. With more knowledge of equity release facts, homeowners can now stay in their property and enjoy the fruits of their working lives & the attachment of remaining where they brought up their family.
With any Equity Release Council approved scheme, whether Lifetime Mortgage or Home Reversion, the lender will always guarantee permanent residence in the property. In fact, with Lifetime Mortgages, you also retain 100% ownership of the property, even after taking a release of equity.
Historically, equity release schemes have not required any payments to be made. No repayments can ever be made on a Home Reversion Plan; however, Lifetime Mortgages are different.
Payment restrictions have sometimes been to the detriment of equity release schemes and why negative feedback has been associated with the industry. However, with improvements in product design and flexibility, homeowners now have ‘choice’ with Lifetime Mortgages; the choice to decide whether they would like to make repayments, or not.
Choosing not to make payments, will result in ‘roll-up’ of interest, which effectively means the interest charged by the lender will compound either monthly, or annually (i.e. not interest simple) and added to the balance. Consequently, the balance increases over time and assuming property values remain static, would result in the net equity figure (inheritance) reducing over the lifetime of the homeowners.
However, if repayments are made back to the lender, then depending on how much is repaid, this compounding of interest can be reduced, halted, and with some schemes now, the mortgage balance can fall & be repaid in full using voluntary payments.
Home Reversion schemes, by their nature were the only equity release mortgage that could previously guarantee an inheritance for beneficiaries. This was due to the fact that with home reversion plans, you sell part, or all of your property to the reversion provider. Therefore, if you sold 60%, this would guarantee that 40% of the property would still be passed to your beneficiaries upon sale of the property.
However, for Lifetime Mortgages, due to the interest element which is invariably added to the loan, a guarantee was never previously an option. However, most Lifetime Mortgage companies now offer the option to add an Inheritance Protection feature. If not, some now automatically include this feature, should the maximum lump sum not be taken at the outset.
Inheritance protection therefore can ensure that even after taking a release of equity, homeowners can still guarantee that some equity in the property can be passed to their chosen heirs upon their demise.
When checking equity release facts, it is important to remember that even after all the funds have been spent, that you will remain responsible for the property and the terms and conditions placed upon it by the lender.
These equity release T&C’s are not onerous and are always shown in section 7 of your personalised Key Facts Illustration which your equity release adviser should always run through with you.
Additionally, upon receipt of your mortgage offer your own equity release solicitor will run through your obligations that are placed upon you as the mortgagor.
In general, these obligations make common sense and is there to protect both the homeowner and the lender ensure they both know where they stand, should anything occur in the future. These could include provision for repairs and maintenance to the property, whether anyone else can live there, leaving the home unoccupied, the repayment period following death or long-term care, or even the situation upon bankruptcy or CPO being placed upon the property.
Transferring from property to property
Bearing in mind people still do move home in retirement, there may come a time when you wish to consider moving to another property after taking an equity release mortgage. This could be for reasons such as wanting to live near the family, mobility reasons, moving into a bungalow, or even into a retirement development where one can be looked after more.
With ALL schemes that are approved by the Equity Release Council, you have the freedom to transfer your equity release plan to a new property, without incurring an early repayment charge. The lender would firstly need to assess the new property meets their underwriting criteria, and also that the new properties valuation fitted in with the existing scheme and balance.
Some equity release schemes from the likes of Hodge & Retirement Advantage will allow you to repay the whole scheme in full, should you downsize after 5 years of taking out their plan. This means that if you didn’t want to keep the mortgage, there are now plans that will allow early repayment upon downsizing.
One of the most important considerations for anyone taking out a lifetime mortgage is the penalties applied by the lender, should the scheme be repaid early. Unlike residential mortgages where you have fixed penalties over a fixed period, equity release schemes can differ & be much costlier, if paid off early.
By design, equity release schemes should run for the rest of your life and lenders have costed these plans accordingly. Therefore, if repayment arises earlier than expected lenders can levy penalties which vary & can be as high as 25% of the original amount borrowed & run for the lifetime of the loan.
However, not all companies operate on this basis and some will operate with fixed penalties over a fixed number of years, the shortest of which is currently 8 years with Retirement Advantage. Therefore, early repayment charges are always something to check before taking out any equity release plan.
As discussed previously, should a roll-up equity release mortgage be taken, then with the compounding effect of the interest, this will result in an inevitable reduction in your estate value, and any inheritance to your heirs. However, we have also discussed plans where repayments can now be made, which allow voluntary payments to be made to control the future balance and therefore protect any inheritance.
Your adviser’s role is to discuss how important it is that you leave part, or all your estate to your beneficiaries. The answer to this will determine what kind of scheme, even how much of a lump sum should be taken to meet your wishes, if any at all, for your beneficiaries.
Peace of mind
The equity release industry has come a long way to now become one of the fastest growing sectors of the mortgage industry. It is estimated that over £3 billion will be released by homeowners using home reversion & lifetime mortgages in 2017.
The reasons for its increasing popularity are the measures the industry has taken to provide security for homeowners over the age of 55. Firstly, we have regulation by the Financial Conduct Authority which means that consumers have a point of contact for redress with any compliant they may have in the future.
Also, the Equity Release Council is the recognised trade body within the industry to help with product design and plan features that aim to protect the consumer, such as the No-Negative Equity Guarantee and the Code of Conduct that Lenders, Advisers and Solicitors, must abide by. Any adviser or company, operating in the equity release industry can be checked for validity on either of the FCA or ERC’s websites.