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Equity Release- do the sums add up?


   If you have already retired and find yourself short of income, but don’t want to move away from your present property, you might want to consider some form of equity release scheme.  There are essentially two types of equity release scheme.  One is where you sell all, or a part of, your house and the other is where you take out a lifetime mortgage on the property.  Let’s look at the details.

1.   Reversion

With this type of arrangement you sell either all of your home or a percentage of it, usually to an insurance company or the like, but you retain the right to live in it for the rest of your life (and usually your spouse’s life as well).  This is either rent-free or sometimes for a peppercorn rent. When the house is sold, the insurance company get the benefit of any increase in the value of the property (assuming you sold 100% of it), but also they have to take a risk on the value of the property going down as has happened recently. You don’t have to sell the whole of your property, you can just sell a proportion of it, usually in multiples of £10,000. And it can be taken out jointly with your spouse or partner which means that it will continue until the second death.

The amount of money that you will be offered will be significantly less than the value of the percentage of the home that you sell.  Let’s say that you have a house worth £290,000 and you want to sell 70% of it.  This equates to a present day value of £203,000.  The chances are you will be offered a lump sum of about £90,000 (about 45% of the total you want to sell, or, put another way, about £4,500 for every £10,000 of value).  When the house is sold (usually when both you and your spouse or partner has died) the insurance company will take 70% of the sales proceeds with the balance being left to your estate.
 
How much you get offered depends on a number of factors, but essentially revolves around how long the insurance company expects you to live.  Generally speaking women will get a better rate than men of the same age simply because, statistically, women live longer.  Logically therefore, the older you are at the time you take out the scheme the bigger the amount you will get as a percentage of the current value.
 
Let’s assume that you want to go ahead with the offer.  The next questions are how you want the money paid and what are you going to do with it.  You could take the money as a lump sum and then invest it.  The Insurance company may well try and sell you an annuity (see our article on annuities available to members elsewhere) and this will provide you with a regular income, but will be liable to income tax.  If you take the money in a series of small lump sums you may be able to avoid tax because tax is not normally payable on the sale of your home.  However, before doing anything you really should get advice from a Financial Adviser.  Details of recommended advisers are given elsewhere on the Retirement Revenue website.  If you want to obtain the latest up-to-date information on budget changes, the Which? site has all the latest data.  Please remember that under our Terms and Conditions, nothing in this article constitutes advice.
 
There are a few other matters that you will have to comply with.   In most cases you must be at least 65 or 70 years old.  Your property must be in a reasonable state of repair and must be worth at least £80,000.  Eligibility conditions vary from one company to the next so it’s best to shop around a bit or ask your Independent Financial Adviser (IFA).
 
 
2.   Lifetime Mortgage

Like an ordinary mortgage, this is an amount that you borrow against the value and the security of your home.  The difference being that the capital repayment and the interest chargeable on the outstanding amount are “rolled-up” and don’t become payable until the house is sold when you die or if you move away permanently from your property.  This might happen if you were to move in with a member of your family or perhaps into a care home.  A lifetime mortgage can be taken out on joint lives so it does not have to be repaid until the second death.

As with an ordinary mortgage the interest rate can be fixed or variable for the life of the loan.  More often than not it will be fixed.  You must bear in mind that interest is chargeable on the entire amount outstanding, not just on the amount of the original loan.  You have to pay interest on the interest.  The total amount outstanding on the loan can therefore increase quite quickly and you should ask your IFA to provide you with figures showing how much the loan will increase over time in your particular circumstances.  Just to give you an example, if you borrowed £20,000 at a fixed rate of 6% over a 20 year period, the total amount outstanding at the end would be approximately £64,142.  This rapid increase can get a bit scary, so make sure you realise what it might amount to.  Of course, one hopes that the value of the property will increase as well, but this is by no means certain.

As with a reversionary scheme that we described earlier, you can take the mortgage as a lump sum and use it to make an investment to provide you with a regular income, or you can take it in a series of smaller payments.  Again, the latter method is likely to be more tax efficient.

One advantage of a lifetime mortgage over the reversionary scheme is that you are likely to be eligible at an earlier age.  Some companies will offer you a lifetime mortgage at age 55, but 60 is more common.  Of course, the earlier you take out a lifetime mortgage, the larger it is likely to become over your lifetime.

There will be restrictions on the amount that you can borrow and the absolute maximum is unlikely to be more than half the value of your home and you will have to have at least £50,000 of equity available in your property.  Available equity is the amount of money left in your home after deducting any loans secured against it from the current value of the property.   If you have an existing mortgage on your house, you will have to pay that off out of the sum payable with the new lifetime mortgage.

The lifetime mortgage will be repaid on the death of the surviving spouse or partner and any remaining balance will be paid into your estate.

There is one final point that we want to emphasise and it really is very, very important.  Whether you go for the Reversionary Scheme or the Lifetime Mortgage arrangement, you must use a company that is a member of the Safe Home Income Plans body (SHIP).  Members of SHIP have their own code of best business practice and offer “no-negative-equity” guarantees.  We have seen in recent times how the value of property can fall quite alarmingly and you (or your heirs) don’t want to be in a situation where the amount outstanding on the loan is more than the value of the property.   You can find members of the SHIP scheme and a lot more information on their website at www.ship-ltd.org.

Hopefully we have been able to give you some insight into the options available to you through equity release schemes, but before you take any action, please do go and see an IFA. 

Retirement Revenue Summary


Reversion
  • You sell all or a percentage of your home, but retain the right to live in it.
  • Insurance company will get the benefit of any increase in value
  • You don't have to sell all of the property
  • The amount offered will be a lot less than the value
  • Women likely to get a better rate than men of the same age
  • The older you are the bigger the percentage of the value that you will get
  • Tax is not normally payable on the sale of your home
  • Shop around and get advice from an IFA

Lifetime Mortgage
  • Like an ordinary mortgage, but repayments and interest 'rolled up'
  • Interest rate can be fixed or variable
  • Total amount outstanding can increase rapidly
  • Maximum mortgage likely to be less than half the value of your home

Use a company that is a member of the Safe Homes Income Plans body.

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