Bread and Butter Advice equity release FAQ

We have compiled the below comprehensive list of frequently asked questions about Equity Release, with simple explanations and useful links to help guide you through the process.

Equity Release – Frequently Asked Questions

Equity release is the term used to describe the different ways in which you can benefit from the value of your home without having to move out of it. You can either take out a loan secured on your home, or sell part, or all, of your home to give you a regular income or a lump sum, or both.

With increasing pressures on retirement savings and income, for most people the home they live in represents their major capital investment. As they grow older, many owner-occupiers find themselves in the frustrating position of having a very valuable asset on the one hand, and a restricted income on the other. Using the capital value of the house, whilst continuing to live in it, can help to ease this situation.

You will have a choice, depending on the exact plan you use, whether to make monthly payments against the amount you have released (just like a normal mortgage); or you can repay nothing until your house is sold when you die, or move out.

There are three main types of schemes that allow you to release equity from your home. These are ‘lifetime mortgages’ ‘home reversions’ and ‘retirement interest only mortgages’. The first two are classed as ‘equity release schemes’, whilst the third is not equity release; but is a relatively new product that is aimed at providing mortgages to older borrowers.

With a ‘lifetime mortgage’, you take out a loan secured on your home and repay the loan from the proceeds of the sale of your home when you die, or if you move out of it. Critically you continue to own your home.

With ‘home reversions’ you sell a part or all of your home to someone else, usually a mortgage lender, and in return you receive a regular income or a cash lump sum and continue to live in your home for as long as possible. The home is sold when you die, or if you move out of it.

With ‘retirement interest only mortgages’ you borrow a lump sum secured against your home and pay monthly interest on the loan. You repay the debt when your home is sold, or another ‘agreed event’. Unlike the other two options, you will need to pass an affordability check to ensure you can keep up the repayments. Your home will be at risk of repossession if you do not keep up with the repayments.

There are many different schemes, some of which can provide a cash lump sum, some a regular income, or some can even provide a mixture of both.

Anything you want. You may wish to spend some improving/maintaining your home. You may wish to have a really good holiday. You may want to pay privately for an operation. You may wish to help your children or grandchildren. You may wish to look at ways to avoid paying inheritance tax. The list is endless, and the choice is yours.

Lifetime Mortgages and retirement interest only mortgages are a regulated activity under the Financial Conduct Authority. This means that advisers and lenders must be authorised and regulated under the Financial Conduct Authority (FCA). Home Reversion Plans are also regulated. You should ensure that the person who gives you the advice is licensed and has experience in this area of expertise. At Bread and Butter Advice, our specialist advisers are both licensed and experienced.

You have to be aged at least 55, (if there are two of you, that is the age of the youngest of you) and you have to own your own home. if you still have a mortgage outstanding you may be able to remortgage to one of these products if appropriate.

No. There are currently 12 lenders offering a variety of schemes (Source The Telegraph: June 2018). Your adviser should be independent and be able to look at the best scheme to satisfy your requirements. The lenders with the biggest advertising budgets may not necessarily be offering the most appropriate deal for you! At Bread and Butter Advice we are independent financial advisers and are able to research the whole market to ensure that you receive advice specifically tailored to suit your circumstances.

Yes. These will vary depending on the product taken, but will typically include some or all of the following:

  • An arrangement fee;
  • A valuation fee;
  • Legal costs;
  • Early repayment charge;
  • Possible rental charges;
  • An adviser fee.

Some of these charges can be added to the loan, so you pay less up front if you wish. All charges must be discussed and confirmed in writing with you before you make any commitment.

Some state benefits are income related and whilst the value of your home is not included in any means-tested assessments, capital released from it would be. At Bread and Butter Advice we always look at whether any state benefits could be affected as part of the advice process.

Currently the money you release from your house is tax free. However, if it is then invested, any income from the investment may then be taxable. Whether or not you pay tax will depend on your total income. Any tax payable will be income tax.

If you take out a mortgage or sell all or part of your home, it will reduce the value of the estate you leave when you die. This may reduce the level of inheritance tax which may be payable (currently applicable to estates valued at in excess £325,000 in the 2019/2020 tax year). At Bread and Butter Advice we consider the impact of inheritance tax on your estate as part of the advice given on lifetime mortgages.

Most lenders offer a no negative equity guarantee which means that there is a promise that you or any beneficiaries will never have to repay more than the value of your home, no matter what interest is owing. At Bread and Butter Advice we always ensure that this guarantee is in the product recommended by us.

You will always be responsible for keeping your home in good repair, even if you have sold some, or all, of your home to a home reversion company. If you do not, then the scheme provider may arrange to do necessary repairs, but you will have to pay for them, or the cost be added to the amount you owe.

It may be a good idea, and we would encourage you to do so. However, it is appreciated that you may not wish them to know about your financial affairs and the decision is with you. Bread and Butter Advice does not release information to anyone unless you ask us to.

If there are two of you, the scheme continues until the second of you dies. If there is just one of you, the property would need to be sold and the debt repaid, without any penalties incurred, although interest would still be charged up to the time the house is sold. If you have bought an annuity (an income) with the capital raised from the equity release, then the annuity may cease, and it may then turn out to have been poor value. At Bread and Butter Advice we explain clearly the impact on your personal situation of the scheme recommended for you.

The scheme will carry on unchanged if care is provided in your own home or just one of you has care provided away from home. If you both move into a care home, the scheme will usually end and your home will normally be sold and the debt repaid. Any surplus funds will then belong to you.

At Bread and Butter Advice we have specialist advisers qualified to advise on the best way to pay for long term care fees.

If you have a secured loan on your property and are making interest only monthly repayments, your home will be at risk if you do not make those payments. If you are not required to make repayments under the scheme, then unless you break the terms of any contracts (for example do not maintain your property) then the answer is no.

Most schemes can be transferred if the new home is acceptable to the lender. If you are moving to a lower-value property, you will usually have to repay part of a lifetime mortgage or repay part of a home reversion from the sale proceeds of the original home. if the loan is repaid in full, there may be early repayment charges (usually within the first five years).

You can always pay off a lifetime mortgage or retirement interest only mortgage at any time, although there may be early repayment charges. You cannot cancel a home reversion scheme.

You might take out one of these schemes whilst single, but may later decide to share your home with someone else. If you wish to transfer the scheme into joint names it may not be possible if that person is younger. The person could move in, but on your death or move into care, that person would not be able to continue to live there.

Not all providers are members of this organisation, which operates a code of practice, ensuring a no-negative equity guarantee. At Bread and Butter Advice we will always consider a provider who is a member of the scheme before any other.

If interest is being added to the loan, then the debt will increase. With lifetime mortgages with a shared appreciation element, and home reversions, the amount the scheme provider gets when your home is sold depends on how the value of your home has changed since you started the scheme.

If house prices rise sharply then the scheme may turn out to be very expensive. Alternatively, if house prices rise very slowly, or fall, you will have had a good deal. There is therefore an element of risk involved with any of these schemes. However, your estate will not be liable for any debt beyond the property value, regardless of future house prices.

No. There are alternative solutions, some of which may even be better for you such as selling and buying a smaller property; checking with the council to see if you can claim income benefits; claiming state benefits or using your savings or investments. It is really important to seek good, independent advice from someone who is aware of all the alternatives. At Bread and Butter Advice we focus on offering advice which is relevant to a client’s whole situation, not just on one matter.

How do I find out more?

Contact Bread and Butter Advice for a no obligation appointment at our expense, to discuss whether a lifetime mortgage is right for you.

This informative guide explains in simple terms what options are available if you are considering releasing money from your home. Of course, such a guide can never be completely definitive. If you would like to discuss in detail how some of these areas may be of help to you please call us to arrange an appointment with one of our financial advisers.

You can also obtain a free guide from the Money Advice Service at; www.moneyadviceservice.org.uk

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