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:
Equity release schemes are rapidly growing in prevalence in the UK and overseas – and with good reason. As more and more people are unfortunately finding they have left it too late to prepare for the cost of care, equity release is understandably becoming an increasingly popular option. The two most popular options are lifetime mortgages or home reversion plans.
Equity release schemes provide instant access to funds that can be used to pay for care in the short or long term. But as the needs of customers continue to diversify, new products emerge on the market to meet them. In this informative guide we explain the two broader categories most equity release schemes fall into, and share the benefits and drawbacks of each to help you to make the right decision depending on your individual situation and needs. For more information on how equity release works, please refer to our comprehensive guide here.
When the opportunity to put aside money to pay for care in the future has passed, the range of options for investments that don’t affect quality of life and inheritance begin to narrow. Therefore equity release has become one of the most viable and attractive ways to fund care – and with good reason. Equity release schemes enable you to retain ownership of your home and in most cases continue to live there.
Some people won’t be eligible for certain types of equity release schemes – or it may not be a suitable option at all.
For example, you may prefer to sell your property and move to sheltered accommodation, using the funds raised from downsizing to pay for additional care needs.
Your property may be held in trust.
If you are still paying the original mortgage on your home it will need to be paid off in full before you can apply for an equity release scheme. To discover more about equity release schemes and decide whether this may be a viable option for you, take a look at our handy guide here.
The first kind of equity release scheme is known as a lifetime mortgage.
This is the most popular type of equity release scheme, as it’s the most flexible and versatile option.
It’s easiest to think of a lifetime mortgage as a kind of long-term loan, secured against the value of your property. The difference with this compared with regular mortgages or loans is that although interest is added by the lifetime mortgage providers (usually on a yearly basis), no repayments are due until the termination of the contract – which usually occurs upon death or the sale of the property.
As with all investment options, there are benefits and drawbacks to consider if you are thinking about approaching lifetime mortgage providers.
Here is a video explaining how a lifetime mortgage works.
Retaining ownership of your property – in the event that you wish to keep it in the family, sell early should circumstances change, or plan on yourself or family members continuing to livethere indefinitely.
Freedom to use your money – The money borrowed can be spent (or reinvested) however you choose, giving you freedom and flexibility.
Negative equity guarantee – Many lifetime mortgage providers offer a ‘negative equity guarantee’, ensuring that you won’t have to pay back more than you received when you eventually come to sell your property.
Inheritance planning – Some also allow you to portion and protect a percentage of the property’s value to gift as inheritance, or make partial repayments early should your circumstances change.
Reduces your inheritance – Equity release schemes and lifetime mortgages in particular are likely to reduce the amount of inheritance you’re able to gift to family members and friends. However this is less of a concern if the cost of imminent care needs is likely to reduce the amount you can leave when you pass away.
Impact on benefits and tax position – A lifetime mortgage can affect your entitlement to certain welfare payments as well as your tax position – so it’s worth obtaining a clear picture of how enrolling on a scheme could affect your income situation before making a decision.
Accruing interest – Lifetime mortgages accrue interest – both on the mortgage itself and the interest added each year. This significantly increases the amount you’ll have to repay later down the line. (Interest only lifetime mortgages can be taken out to alleviate this – as detailed below.)
Repayment – You may need permission or be forced to make repayment early should you decide to rent out your property or sell it before the agreed period of time has lapsed. This can become rather complicated if you do change your mind or find that your circumstances change.
It is essential that you use a specialist to secure an equity release scheme. They will ensure that your interests are always protected and also ensure that you dont waste thousands of pounds on a bad deal.
There are two options for you to consider.
We have created a directory of advisors that specialise in helping people find the right equity release provider. The directory has advisors listed from all over the country. You can access the equity release advisor directory here.
If you do not feel confident in choosing an advisor, you can leave your details below, and we will find an advisor for you. We do not charge for this service and it is absolutely free.
Here is a video from Martin Lewis on ‘This Morning’ explaining why you should speak to a specialist before taking on an equity release plan.
The lifetime mortgage rate that you will get will typically depend on the amount of loan to value you are taking. However, typically you would see rates starting around 3.5% going up to about 7%. As you can see, the range of lifetime mortgage rates that you can get are very wide. That is why we strongly recommend that you speak to a specialist to help you find the best rate. You can find a list of equity release specialists here.
A range of different products also fall under the umbrella of lifetime mortgages – further increasing the potential for complications and confusion as you make your decision.
Each has benefits and drawbacks of its own – but many have been developed to circumvent or alleviate problems that have been run into by traditional standalone policies.
One such example is the ‘interest only lifetime mortgage’ – which prevents the need for a huge repayment inclusive of interest on termination of the contract through low monthly repayments which cover interest accrued.
An interest only lifetime mortgage also helps homeowners to protect a greater portion of their property for inheritance purposes. Another type of equity release scheme, known as a ‘home reversion plan’ has additional benefits for those looking to remain living in their property long-term.
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.