What is equity release?
An equity release scheme lets you raise money from your property – as either a lump sum or a regular income or both – while giving you and your partner the right to remain living there until you die or move out.
These schemes essentially allow you to borrow money against the value of your home, with the debt being repaid from the sale proceeds once you die.
How does it work? There are a range of different equity release schemes available, all of which work on the same principle – that they lend you a part of your home’s value in return for a share of the proceeds after your death.
The main types of equity release schemes that are available in Scotland are lifetime mortgages and home reversion. A lifetime mortgage involves taking out a new loan on your property, while the home reversion involves selling all or part, of the ownership of your home.
Why choose an equity release scheme? Pensions are a major issue for many people who are either approaching retirement age or are currently retired. Many people have to manage on a small pension or limited savings – but they can be living in a property that is worth a great deal of money.
Equity release can provide a way of getting additional income to make daily life more comfortable. If choosing a scheme that gives you a lump sum of money, this could be tens of thousands of pounds – or it could be regular income worth as much as a hundred pounds a month or more.
Equity release is also an especially appealing prospect to retired people who have no family or children that they feel obligated to leave their property to when they die.
Who can make equity release? For the majority of cases, in order to set up an equity release you will need to be at least 60 years old, own a property in reasonable condition have no outstanding mortgage. If there is still any outstanding balance on your mortgage you may still be able to arrange an equity release, but you will need to use some of this money to pay down your existing loan.
Tax free income and other benefits
A main benefit of equity release is that all money released from the value of your property is free of tax. However, if you decide to then invest this money, you may be liable to pay tax on any income or growth from this investment.
Another benefit is that you won’t have to move house or sell your home to unlock equity – as you will be guaranteed to be able to keep living in your home until you die or decide to move out. In some cases, it is also possible leave some of the property’s value to your family.
You will also be able to use equity release to pay for care bills without having to sell your property to do so – which can provide financial relief for elderly people during an otherwise traumatic time in their lives.
Leaving money for your family In some cases, equity release plans can be a legal way of mitigating inheritance tax (IHT) on assets that you want to leave to your family when you die. Instead of passing your property to your next of kin, who will be liable to pay IHT on it, you can use equity release to obtain a lump sum of cash to pass on to your family before you die. This can, for example, give a child or grandchild the deposit they need to buy their own property – or simply allow you to witness your family enjoying and using the money that you’d planned to give them in your will while you are still alive.
Avoid the risks Always look for plans that carry the Safe Home Income Plans logo (SHIP) – which represents the industry body that promotes safe equity release schemes. This will provide important guarantees, such as maintaining the right to live in your property for life, the freedom to move home without incurring any penalties and ensure that you never owe more than the value of your property.
Remember that if your equity scheme’s income comes from an annuity, you are likely to get a better rate the older you are. Therefore, if you have just retired, you may receive a better deal if you wait a couple of years before signing up to an equity release deal.
If you are elderly or an invalid, you may also want to avoid a scheme that pays you a monthly income, as its possible may not live long enough to get the best return from it.
Be careful of costs Remember that interest rates on equity release schemes are still higher than they are on traditional mortgages, so search around for the deal that offers the best return.
Equity release plans may also involve paying valuation and legal fees, which may only be refunded if you go-ahead with the plan.
You also need to remember that you remain responsible for repairing and insuring your home, and will still have to pay all council tax bills. Reversion companies will also expect you to maintain your home to a reasonable standard in order to protect their investment, so you may incur additional maintenance costs to meet these demands.
Look at the alternatives
Equity release is not the best option for everybody. If you have other assets or investments which could boost your income or give you the lump sum of money that you need, then you will not need to seek out an equity release as well.
You should also look at whether moving to a less expensive property would be a more suitable way of freeing up money that is tied-up in your estate – as you may not feel comfortable allowing an equity release company to profit from your home.
If in doubt, talk to an expert to get advice that will help you make your choice.
Get the right advice Equity release plans can be complicated products and are a major step for some people – as their properties are likely to be the most valuable asset they own. Like any decision about your home, it should not be taken lightly. You should always get good, independent advice from a financial advisor or family law expert who will help you determine whether equity release is the best option for you and help you find the right type of scheme that will be suitable for your needs. A reputable Scottish law practitioner – like family law in Edinburgh firm Gibson Kerr, which provides a comprehensive service encompassing both property and personal law, including powers of attorney, executries and wills – will be able to assist you with any equity release questions you may have.