At Lewis Nedas Law, our conveyancing expertise includes dealing with ‘equity release’ schemes.
These schemes are mortgage products intended for those aged 55 or over who own their home.
The typical borrower is looking to raise some cash and may consider using an equity release scheme.
While downsizing or a standard mortgage may be more cost effective strategy for personal reasons a borrower may decide to go ahead with an equity release scheme.
Accordingly, equity release schemes are not for everyone and it is important you fully consider your options and take independent financial advice before making a decision.
Moreover, they are a long term option and you may require a more flexible arrangement.
By using an equity release scheme it generally means that if you have friends and family to pass your assets to there will be less for them to inherit, as you will have taken part of the value of your home in cash during your lifetime.
There are two main types of equity release.
‘Lifetime mortgages’ where a mortgage is taken over your home and, ‘Home reversion schemes’ where you sell a share in your home.
In both cases you are unlocking part of the value in your home and turning it into a cash lump sum.
The money can usually be drawn down as one lump sum or in several instalments.
Lifetime Mortgages are for those aged 55 and over where you borrow part of your home’s value at a fixed or capped rate of interest. Some types of this kind of mortgage do not require interest repayments and allow the interest to compound so that the amount you owe increases rapidly. Other types allow you pay interest and to pay back some of the capital as well.
Arrangement fees will be payable before entering into the mortgage.
The amount that provider will release to you will depend on your age and the value of your home. Some providers will be prepared to lend larger sums to those with certain past or present medical conditions.
Lifetime mortgage rates are about 5% although some rates are under 3%.
If interest is compounded or ‘rolled up’ over the period of the loan the debt could double in 14 years at current rates. So for example if you borrow £20,000 aged 60 at 5.1 percent on a £120,000 home the amount you owe at 74 will double to £40,000 and to £80,000 when you are 88.
Usually nothing has to be paid back until you die or go into permanent long term care. If you are part of a couple, the repayment is not made until the last remaining person living in your home either dies or moves into permanent long term care.
For Home reversion schemes you need to be 65 or over and you sell a share of your home to the provider for less than the market value. You have the right to remain in your home for the rest of your life or until you go into long-term care and your home is sold. Your occupation will be on a rent free basis.
When your home is sold the proceeds are split on the percentage you own and the percentage the lender owns.
If you for instance, sold a 40% share in your home which was valued at the time at £200,000, to a provider you may only receive from him £40,000, a discount of £40,000 on the £80,000 that the 40% share represents, to compensate the lender for the time it will take to get his money back. When your home is sold the provider will get 40% of the price paid for the property at that time, and it may have substantially increased in value. So if the property was sold for £300,000 the provider would be entitled to receive £120,000.
Again the provider may be able to give you more funds depending on your age and medical condition.
‘Which’ says that equity release ‘does not come cheap’ a lifetime mortgage can cost three times what you borrow after 20 years and a home reversion scheme can demand more than 70% of your home’s value for just a 20% advance.
When taking an equity release product you should also ensure that the provider is a member of the Equity Release Council. This body ensures that there will be ‘a no negative guarantee’ so that your estate will never owe more than your home is worth.
If you are considering an equity release scheme and would like to speak to Richard Greenby, the author of this article please contact him on 0207 691 4560.
Please note that this article does not constitute legal advice and you should always consider contacting a solicitor before embarking on an equity release scheme.