Equity Release in Scotland

What is equity release? 

Equity release is a strategy through which you can unlock the value of your property and turn it into a tax-free lump sum of cash. You have the option to use the released equity to pay off any other debt you may have, including mortgages or credit cards, use it to pay for your care costs or simply just to enjoy your later life.

In order to qualify for any form of equity release, you need to be at least 55 years of age, and to legally own the property.

Here is a short video that explains what equity release is.

How does equity release work in Scotland?

It is not uncommon to wonder how does equity release work in Scotland, especially since it has become a viable option for many property owners in the country.

Put simply, when you opt to unlock the value of your property, the lender gives you a tax-free lump sum which you can use whichever way you want as long as you are not breaking the law.

The Equity Release Council Code of Conduct in Scotland clearly states that homeowners are guaranteed to keep living in their property until death or entry into long-term care.

Furthermore, the equity release council also gives the “No Negative Equity” guarantee which ensures that the amount you borrow will never exceed the value of your property. In this way, it protects your beneficiaries from being subjected to crippling debt.

There are different types of equity release, including:

Lifetime mortgage

Lifetime mortgages have proven to be the most popular type of equity release schemes. Your property might be worth a few thousand pounds but you may not be able to access these funds. This is where a lifetime mortgage comes in, allowing you to access this money and use it as you please.

Lifetime mortgages were first introduced in the mid-sixties as equity release plans for customers. Over time, they have seen massive improvements and strict regulations allowing them to cater to the needs of users in a more flexible manner.

Today, property owners that are over the age of 55 can release some of the equity tied up in their homes with lifetime mortgage plans. Unlike normal mortgages, they don’t have pre-determined and fixed repayment dates.

The only time you will be required to repay the loan is when your property is sold in the event of you and your partner’s death, or when a surviving partner moves into a residential care home for an extended period of time.

There are two types of lifetime mortgages:

A Lump Sum lifetime mortgage

This type is secured against your property just like a normal mortgage, and it allows you to take out a one-off tax-free cash lump sum. There are usually no monthly payments to be made, but there are many equity release schemes that will allow you to pay the interest monthly.

Additionally, the interest to be applied is usually at a fixed rate, although there are variable rates also available if they are considered to be more appropriate. Upon death or entry into residential care by a surviving partner, your nominated executor will then sell the property in order to repay the loan.

A Drawdown lifetime mortgage

With a drawdown lifetime mortgage, you will be initially lent a relatively smaller amount of “lump sum”, along with a drawdown facility or a reserve which can be utilised at a later date, either as a one-off or in smaller pieces.

You will be charged a fixed rate of interest for the initial release and any subsequent drawdowns, although there are variable rates available where it is considered appropriate. The funds withdrawn from the drawdown facility are normally fixed as well, and they are charged at the prevailing rate of interest offered by the lender at the time of the drawdown. With this type, the property can also be sold by your nominated executor upon death or entry into long-term residential care.

Home reversion plan

Home reversion plans are far less popular with property owners due to the fact that they don’t offer the security of retaining the ownership of your home. With home reversion plans, some or all of your equity is sold to the lender for an agreed amount of money.

However, you can still stay in the property for the rest of your life even without fully or partly owning it.

Upon death or entry into residential care by the surviving property owner, the lender will claim their share of the property. Keep in mind that you will still be in charge of the maintenance of the property regardless of the plan that you have in place.

Pros and cons of equity release

The pros and cons of equity release vary depending on the equity release scheme you have.

Here is a short video on the pros and cons.

Pros of lifetime mortgages

– There are plans provided for a wide age bracket, ranging from ages 55-95.

– Depending on the plan that will be recommended, you have the option to make monthly payments or not.

– There is also the alternative of fixed interest rates for the duration of the plan.

– You will receive full benefits from any future increase in property value.

– There are optional guarantees that offer protection to a portion of your estate for your family.

Cons of lifetime mortgages

– There may be early repayment charges

– The inheritance your beneficiaries receive may be considerably reduced as a result of following this plan.

– If you make no payment to the mortgage, the balance for this plan will increase significantly over time.

– The money raised from these mortgages is typically less than that from home reversion plans.

– It costs more to take them out than selling your property outright.

Pros of home reversion plan

– Although plans are available from age 65, individuals from age 55 are also taken into consideration if there is evidence of poor health.

– There is usually no accumulation of interest, hence you don’t have to worry about growing debt.

– You can be assured that a guaranteed percentage of the property will be passed to your beneficiaries.

– The money raised with a home inversion plan is more than that from mortgages.

– You get to reap the benefits of the increase in the value of your share of the property.

Cons of home reversion plan

– The biggest downside of a home reversion plan that turns most people off is the fact that you will no longer have complete ownership of your own property.

– If you opt to sell all your property, your estate will not be entitled to any inheritance.

– You risk a disproportionately high loss to your estate if you die shortly after taking a home reversion plan.

Equity release calculator for Scotland

To find out how much money you could potentially release from your property, opt to use an equity release calculator for Scotland to get accurate results.

For example, using the calculator, if you are 55 years old and your house is worth around ₤70,000, you could release up to ₤17,850. On the other hand, a 95-year-old individual with a home of the same value could release up to ₤38,500.

In another example, if you are 55 years old and your home is worth around ₤800,000, you could release up to ₤204,000. In contrast, a 95-year-old with a house of the same value could release up to ₤440,000.

Keep in mind that these amounts are only indications of what could be potentially released, and they are not guaranteed.

Aviva

Aviva is a well-established British company that provides a variety of insurance and assurance products, along with mortgages and long-term financial products as well. One of their products, Aviva equity release, essentially translates as a lifetime mortgage, allowing you to borrow against the value of your property, with interest added to both the loan amount and to the added interest.

Once you pass away or go into long-term care, the home is usually sold and the amount deducted from the sale value of your home. There are currently 2 types of lifestyle mortgages offered by Aviva:

– The lifestyle lump sum max allows you to release equity in a one-off lump sum.

– The other one allows you to take an initial loan of a lesser amount, along with access to a reserve of money in the future.

In order to be eligible for lifetime mortgages with them, you need to be over the age of 55, and you also have to be a homeowner within the UK.

If you are eligible, the mortgage will then be personalised depending on factors such as the type and value of your property, as well as your health and lifestyle choices. Similar to a conventional mortgage, there are no set interest rates with Aviva lifetime mortgages, and you also have the choice to partially or fully release equity.

In the event that you move from one property to another, Aviva equity release lifetime mortgages allow you to transfer your mortgage from one property to another. However, you will have to meet some criteria, and if the property you are to move to has a lower value, you may have to repay a part of the original loan or some interest. Nonetheless, you will still be able to leave some inheritance for your beneficiaries if you choose to.

Royal Bank of Scotland equity release

According to the Royal Bank of Scotland equity release, you may release money from your property to pay for home improvements or use the money to supplement your pension. Products provided by Royal Bank of Scotland for equity release include:

– Lifetime mortgage

– Home reversion

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