‘Equity release’ retirement guide

Published 23rd Jul 2007

For the asset rich, cash poor, equity release is a relatively efficient and safe way to gain a cash lump sum from your property to improve the quality of your life in retirement...

Two types of equity release scheme, the Lifetime Mortgage and the Home Reversion Plan, are available and their suitability depends on your circumstances and preferences.
A Lifetime Mortgage is based on interest on the capital initially borrowed. It accrues annually over the period of a lifetime. The Home Reversion Plan requires the homeowner to sell part of the property.

The lender then releases a capital sum. These products have declined in popularity due to a focus by major lenders on promoting mortgage products; as they are more difficult to understand because of the actuarial adjustment and due to people’s emotional aversion to selling part of their home.

The complexities of both schemes require careful consideration and impartial advice from a company accredited by the Financial Services Association (FSA).

Worst offending schemes ‘outlawed’
Equity release is not without its risks and three alternatives should be considered.
Firstly, downsizing can be the simplest and most cost effective way to realize capital. Secondly, look to any existing savings. Thirdly, find out if any grants are available for home improvements to better equip the property for retirement living.

Next, look at the equity release products in detail, discussing the options with a professional advisor. Be aware that some schemes on the market make similar promises to bone fide equity release products, but are neither safe nor good value.

Pitfalls await the unsuspecting and although many of the worst offending schemes have been outlawed, some plans involving standard variable interest rates, for example, are still being sold. These may look attractive but can become a financial burden in unfavourable market conditions.

There are two types of equity release schemes available in the UK:
Lifetime Mortgage Option
* Offers homeowners a lump sum
* Available to those aged 55 and over
* Secured by a legal charge on their home
* The lump sum is calculated by the age of the applicant and value of the property
* Additional ‘top-ups’ can be taken after three years (subject to certain conditions and additional costs)

A Home Reversion Plan:
* Offers a lump sum to homeowners
* Available to those aged 65 or over
* Lender purchases a percentage share of the property
* The property is jointly owned with the homeowner becoming a tenant.
* This tenancy is rent-free for life
* The lump sum is determined by the age of the applicant and the property’s value
* The lump sum is discounted by an actuarial adjustment reflecting the rent-free lease.
Equity release schemes endorsed by SHIP (Safe Home Income Plan) have a ‘no negative equity guarantee’ that ensures no debt can be passed on to your estate. Members of SHIP also agree to provide fair, simple and complete presentation of equity release plans.

Source: ' Move Channel Ltd '

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