Lifetime Mortgages

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What is Equity Release?

Equity release is a financial product that allows homeowners to access the equity (cash value) built up in their homes without having to sell or move. Typically aimed at older individuals, usually aged 55 or over, who own their own homes with little or no outstanding mortgage, these schemes provide a way for them to supplement their retirement income or pay for home improvements. Equity release comes in various forms, the most common being lifetime mortgages and home reversion plans.

Lifetime Mortgages

A lifetime mortgage is a loan that is secured against the value of your property. You can choose to receive a lump sum, regular payments, or a combination of both. The amount you can borrow depends on your age, the value of your home, and your lender's criteria. Interest is charged on the amount borrowed, but you do not have to make monthly repayments. Instead, the interest is rolled-up and added to the loan, which is repaid when you die or move into long-term care. It is essential to ensure that your lifetime mortgage provider is a member of the Equity Release Council - this guarantees a 'no negative equity' promise, meaning you will never owe more than the value of your property.

Home Reversion Plans

Home reversion plans involve selling a proportion, or all, of your property to a reversion company in exchange for a lump sum, regular payments, or both. You have the right to stay in your home rent-free for the rest of your life or until you move into a care home. Upon your death or moving into long-term care, the house is then sold, and the proceeds are divided based on the percentage of ownership between the company and your estate.

Pros of Equity Release

1. Financial Freedom

Equity release unlocks the value of your home, providing you with valuable funds to finance your retirement, pay for long-term healthcare, make home improvements or allow you to help your family financially.
There are no monthly repayments with most equity release schemes, allowing you to use the cash released for your needs without worrying about meeting monthly financial commitments.

2. Flexible Options

There are various equity release products available, giving you the choice to select a plan that best suits your individual financial situation and requirements.
With a lifetime mortgage, you can opt for a lump sum, regular payments, or a combination of both. You may also choose a drawdown lifetime mortgage, which allows you to access your funds as and when you need them.

3. Long-Term Security

Equity release schemes endorsed by the Equity Release Council come with various guarantees, including a 'no negative equity' guarantee. This ensures that you and your estate will never owe more than the value of your home, providing peace of mind.
Borrowers of a lifetime mortgage maintain 100% ownership of their property and can continue to live in their home until their death or when they move into long-term care.
In the case of home reversion plans, you have the right to live in your home rent-free for the rest of your life.

4. No Impact on Welfare Benefits

Releasing equity in your home can be structured in a way that does not affect your entitlement to means-tested state benefits such as Pension Credit or Council Tax Support.

Cons of Equity Release

1. Reduced Inheritance

Equity release reduces the value of your estate, which may impact the amount of inheritance you leave for your family and beneficiaries. However, some plans offer a protected percentage or inheritance guarantees, which can help preserve an inheritance.

2. Compounding Interest

With a lifetime mortgage, interest is typically compounded, meaning that the amount owed increases over time as interest is added. This may result in a significant debt, leaving little or no equity in your property.

3. Early Repayment Charges

If you wish to repay the funds borrowed through equity release early, you may face substantial early repayment charges. These charges can vary, so it's essential to understand the terms and conditions before entering an equity release agreement.

4. Impact on Home Moves and Downsizing

If you decide to move or downsize, you may face limitations in the types of property you can buy, as not all properties are eligible for equity release. Furthermore, transferring an equity release plan to a new property may incur additional costs.

5. Complex Process

Equity release can be a complicated financial product, and it is important to seek professional advice before making any decisions. There may be more suitable alternatives, such as downsizing or using other forms of borrowing.

Conclusion

Equity release can be an attractive option for older homeowners who are seeking ways to access the financial value of their properties. With the potential for financial freedom and long-term security, it can be a viable solution for some. However, it is crucial to weigh the pros and cons carefully and considering alternative options before making any decisions. Obtaining professional advice from a qualified financial adviser will help you understand better the implications of equity release and whether it's the right choice for your individual circumstances.

Pros and Cons of Equity Release: Key Things to Consider

What is Equity Release?