Types of Equity Release Schemes
The two main types of equity release schemes are lifetime mortgages and home reversion plans.The scheme you choose will affect how much equity you can release.
A lifetime mortgage is the most common type of equity release, allowing you to borrow a proportion of your home’s value. Interest is charged on the amount borrowed, which can be repaid or added to the total loan amount.
Until you die or require long-term care, you are still the legal owner of your house and are free to stay there. The loan is then repaid from the sale of your property.
Alternatively, a home reversion plan involves selling a part or all of your home to a reversion company. In return, you receive a lump sum or regular payments. Until you pass away or enter long-term care, you are permitted to remain rent-free in your home.
The proportion of your property sold to the reversion company will always remain the same, regardless of changes in property prices.
Risks and Benefits of Equity Release
Equity release comes with both benefits and risks. On the positive side, it allows you to access the valued house without having to move out or relocate.
This can provide a significant boost to your finances, particularly if you have no other means of increasing your income.
However, it is important to consider drawbacks as the cost of equity release may be high.
The compounding of interest on a lifetime mortgage can quickly escalate, leaving less inheritance for your family. It may also affect your tax position and entitlement to state benefits.
There’s also a risk of negative equity, although the no negative equity guarantee provided by members of the Equity Release Council means you won’t have to repay more than your home’s value.
Remember that equity release can lower the value of your estate and leave your heirs with less, so it’s crucial to keep this in mind.
Tax Implications of Equity Release
The tax implications of equity release are another critical factor to consider. Although the money you release is tax-free, it could affect your tax position in other ways. If you use the money to make money, for instance, that money can be taxable.
Additionally, equity release may affect your ability to get means-tested benefits. If the money you release, combined with your other savings, exceeds £10,000, it could affect your entitlement to benefits such as Pension Credit and Housing Benefit.
Furthermore, it’s necessary to take into account any potential effects on inheritance tax. If you use equity release to reduce the value of your estate, it could potentially reduce the amount of inheritance tax that might be due when you die.