Im sure you will agree that when it comes to better understanding how equity release works, it can get confusing. This is why we are here to help you!
The key topics in this guide will help explain it all to you in a very straight forward way. In this guide,you will find:
As funding for care becomes an increasingly complex issue for individuals and their families, it’s never been more important to weigh up and explore the range of options available. At UK Care Guide we understand that the period prior to accessing care can often be difficult and confusing. Sometimes the sheer amount of choices feels overwhelming – and when money is tied up or difficult to access this usually adds to the stress and frustration of the situation.
Equity release is becoming an increasingly popular option for individuals and couples planning for later life – especially those considering future care needs. In this comprehensive easy-read article we explain how equity release works, and share key information to help you to decide whether it is a viable option for you.
When stripped back to basics, equity release schemes work by enabling you to release funds (known as ‘equity’) currently tied up in property assets. This makes equity release an attractive option for over 60s who wish to use the money to enjoy retirement, or set some aside for imminent or future care needs.
Equity release schemes work by lending homeowners a lump sum or regular income (usually on a monthly basis), in return for a portion of their property. Money is lent against a value that amounts to less than the market price of your property, and interest is accrued on the loan.
Whilst the benefits are clear, equity release schemes won’t be suitable for everyone. They are however a fantastic option for couples and individuals without savings or additional assets, who would like to use money currently tied up in their property to pay for care.
FLEXIBILITY – Equity release is an attractive option for couples and individuals considering how to fund care in the future or in the short-term because it is flexible and requires little disruption or upheaval.
REMAIN AT HOME – Many equity release schemes enable the homeowner or homeowners to remain at home, enjoying the same quality of life, without compromising in the short-term.
INSTANT ACCESS TO MONEY – Equity release provides instant access to money, which you are free to spend however you like. This is an attractive prospect for individuals needing care who wish to remain at home in the long-term, as it enables them to remain where they are whilst providing ample funds to pay for care at home in addition to necessary modifications or maintenance.
It may also be useful for couples in the event of one person needing residential care – as one spouse or partner can remain at home whilst the other can enjoy the quality and level of care they require.
Here is a video by Martin Lewis on This Morning, explaining why it is essential to get specialist advice before you commit to an equity release plan.
TAKE ACTION HERE – At UK Care Guide, we have compiled an independent list of equity release specialists. They will all be able to discuss and guide you on whether its the right option and also help you find an equity release provider. You can access a list of them here.
Interest rates associated with equity release schemes are generally higher than standard mortgage rates. Typically, the range of equity release interest rates that you see are between 3.5% and 7%. This is a significant range and therefore, you do need to try and fine the best interest rate for your circumstances. This is why always strongly recommend you speak to an equity release specialist before you sign up to a product.
Since equity release schemes are offered on a different basis than standard mortgages, they also provide additional guarantees and fallbacks, such as measures to prevent paying more in the event of a negative equity situation. As interest rates rise and fall, equity release rates are naturally influenced.
Interest rates vary between equity release companies. Some equity release providers will offer static or ‘fixed’ rates, whilst others are variable and subject to inflation.
When making a decision regarding your suitability for equity release it’s key to investigate the amount of interest you’ll be expected to pay. Browse providers and work out how much you will need to repay once the contract is terminated.
Some options enable low monthly repayments to cover interest accrued, so you will only be liable to pay back the loan itself when the contract comes to an end.
Others, such as lifetime mortgages, only ask for interest once the final balance is due – so the decision largely depends on what is right for you. You can find more about lifetime mortgages here.
If traditional equity release schemes aren’t an option for you, or don’t offer you the best deal, you may consider remortgaging to release equity from your property. This is an option to look at when looking at paying for care.
If you are looking to remortgage to release equity then this involves taking out a new, larger mortgage to cover the remaining balance on your property and release a fixed sum for you to use however you wish. Re-mortgaging can be complex and risky, and should be conducted under the guidance of a financial professional who can act with your best interests at heart.
Traditionally equity release was only an option for individuals over the age of 65 – however in recent years policies have become increasingly flexible. It’s now possible to apply for equity release with selected providers from the age of 55 upwards. Therefore, it is not possible to get equity release if you are under 55.
As is the case with all financial investments, equity release schemes have a variety of pros and cons attached to them.
As a whole the concept has pros and cons – but within equity release you’ll find a range of products each with their own individual characteristics. For this reason it’s incredibly important to research your options thoroughly, and identify where products may differ between providers and even based on your individual position financially and personally. As this is often such an important decision it is important that you do your research and make a list of all your equity release pros and cons.
Retain Ownership – You’ll retain ownership of your property for the time being – or at least a portion of it. This enables you to stay in your own home indefinitely – and leaves open a possibility that you could retain some equity from your home at a later stage.
Spend YOUR money – You are free to choose how to spend the money released from your property. For example you can use it to pay for care, re-invest it, gift cash sums to relatives or make necessary improvements at home.
Negative Equity Guarantees – Negative equity guarantees are offered by several providers – this protects you from paying more than you borrowed should your property’s value drop significantly.
Gift as inheritance – Some equity release providers also allow you to protect a portion of your property’s value separately to gift as inheritance. It may also be possible to make partial repayments early should your circumstances change.
Reduced inheritance – A natural consequence of taking out an equity release scheme is reduced inheritance – as you’ll no longer be able to leave your property as a gift. However for those considering later life finance or care funding without much time to spare this may be less of a concern.
Valuation less then market value – The loan you receive against your property is often offered at a valuation less than its market price, so you could be out of pocket if your circumstances change. You may also decide it is best to sell up, although this would of course mean that you will be unable to stay living at home.
Impact on tax status – Enrolment in equity release schemes does affect your tax status and entitlement to certain welfare payments and benefits. For this reason it’s worth obtaining advice to get a clearer picture of how the change will affect you financially.
Interest payments – Most equity release schemes accrue interest – at fixed or variable rates. Thoroughly research providers and interest rates offer before making a decision.
Inflexible – Equity release schemes can be inflexible once they have been taken out – so if your circumstances are likely to change later down the line this may not be the best option for you. For example, if you use up funds released and run out of money earlier than expected or have to move into a residential care home it may be difficult to work around your current solution.
Always weigh up equity release pros and cons with your own personal situation and prognosis in mind – especially if you plan on using the funds made available to pay for care. For complex or particularly unique situations it may be imperative to enlist support from an experienced professional who can guide and advise you based on the information you provide. In addition to equity release specialists, you can find a list of reputable later life financial planners here in our directory.
As well as the video above where Martin Lewis talks about why you should speak to an advisor before taking out an equity release scheme, we recommend you watch this really useful video from the government’s Money Advice Service where individual’s talk about the benefits of taking independent financial advice.
More information on equity release schemes can be found here on the UK Care Guide website, where we specialise in supporting individuals requiring care and their families as they explore their financial options.
You can also find impartial guidance and advice on charity websites such as Age UK and Dementia UK. Check out our informative article here to learn more about the different types of equity release schemes available.
If you are unsure about your options because you feel you don’t have sufficient information regarding your health and personal situation, it’s important to ask for support from a medical professional or social worker. They will be able to give you an accurate picture of your future prospects, which will in turn enable you to make a more sound financial decision that prepares you and provides for your future.