Notes

Understanding Equity Release Plans in the UK

The issues surrounding pensions in the UK affects us all, but it is already a very real and daily challenge for millions of retired Britons. However, many retired people who manage on a small pension and limited

savings are also living in properties which have soared in value in recent years and with the average house price in England and Wales now standing at £192,745 (Land Registry figures for March 2006), people may be not be aware of the true value of their home.


express-finance.co.uk - also called lifetime mortgages, home reversion or interest only mortgages - are a way of releasing cash, whether to buy that new car, to pay for a holiday or home improvements, or simply to make daily life more comfortable. These schemes essentially allow you to borrow money against the value of your home, with the debt being repaid from the sale proceeds after your death.


How they work While there are a range of different schemes offering lump sums and/or regular income, they all work on the same principle: they lend you a part of your home's value in return for a share of the

proceeds when you die.


In most cases you will need to be at least 60 years old, have no outstanding mortgage (or you will need to use the equity release money to pay down the existing loan), and own a property in reasonable

condition.


Equity release plans can be complicated products and are a major step for many people. Your house is almost certainly the most expensive asset you own; it is also your home. Good advice is therefore key.


Age Concern and the Financial Services Authority, the UK's chief financial watchdog, both recommend getting independent financial advice before proceeding.


An Independent Financial Adviser (IFA) will look at your overall finances to see if equity release is really the best option for you.


Types of Equity Release schemes


Here are the main equity release schemes.


Home reversion schemes


You sell your home or a share of it to a reversion company for a lump sum or in return for a monthly income (or a combination of both).


Interest-only mortgages


You borrow a lump sum secured against the value of your home. You pay interest each month, but you have a lump sum to spend as you wish. The capital is eventually repaid out of the sale proceeds.


Lifetime mortgages


The lender gives you a lump sum or monthly income (or both). You pay nothing - the interest is 'rolled up' into the loan. The amount borrowed plus this interest is repaid out of the proceeds from the sale of the

property after you die.


Important points


Your family Equity release plans will reduce what your family will inherit.


While it should ultimately be your choice whether to sign up to a scheme, it is probably a good idea to discuss it with close family members and/or anyone who might have expected to inherit your home. This

may help avoid any unpleasantness or misunderstandings.


Children or other relatives may be prepared to help you out financially instead of you taking out an equity release plan. They could then inherit the whole property. An IFA will be able to advise on any tax

issues involved.


Alternatives


You may have other assets or investments which could boost your income or give you the lump sum you need. An IFA will be able to take a holistic view of your finances.


Consider, too, whether moving to a less expensive property might be a better way of releasing money tied up in your home.


Benefits


If you receive means-tested state benefits, these could be reduced or lost altogether which in turn could mean having to pay more for things like dental treatment and glasses. Check the rules before you take out an equity release plan.


Costs


The equity release market is becoming more competitive and products more flexible. Most equity release plans also involve paying valuation and legal fees. You remain responsible for repairing and insuring your home, and will still have to pay the Council Tax.




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