Q. There are lots of different types of equity release schemes. How can I compare them?
A. There are only two main types of schemes: lifetime mortgages and home reversions. The most popular is a lifetime mortgage, which is like an ordinary mortgage except that you don’t have to make repayments every month. Instead, the loan and any rolled up interest is deducted in one go when you die or sell your home.
Q. How much can I borrow?
A. You can borrow between 20 and 50 per cent of the value of your home with a lifetime mortgage dependent upon age. With a home reversion you actually sell your home or a part of it to a specialist company, which then allows you to live there until you die or go into care. You can generally sell up to 100 per cent of your home, though you normally receive less than the market value. The reason why you receive less than the market value is because you still reserve the right to live in the property, even though it’s sold to the company. To get the highest return possible it is beneficial to get an independent valuation of your property, rather than accepting the reversion companies offer. People aged 75 or older tend to be able to raise more cash, as their life expectancy is shorter. However, there are reversion plans around available to people aged as young as 50.
Q. How do I decide which particular scheme to go for?
A. You should seek expert advice from an financial adviser who specialises in equity release, and who is registered with the Equity Release Council. They will be able to take a look at your individual circumstances and explain what the best options are for you, which may involve looking at other ways of raising cash, such as downsizing your property, borrowing money from family, or even applying for a standard mortgage depending on your age and income. You need to be aware that even though an adviser specialises in equity release not all advisers provide advice on both types of schemes.
NB. Don’t be tempted to make a decision on your own. Many people have regretted taking out an equity release plan because they can be very inflexible, which can cause problems if your circumstances change.
Q. Will my family get any money when I die?
A. This depends greatly on many factors including the type of scheme taken out. With a home reversion scheme your family will receive the sale proceeds relating to the portion of the property which you still own, if you sold less than 100% when taking out the home reversion. This also includes any appreciation on the property value on the portion still owned. With a lifetime mortgage the portion left is more difficult to predict as it will depend on how long the loan has been outstanding and the interest accrued, in addition to any movement in property prices. However, there are providers who allow you to protect a proportion of the equity if required. All products that have been approved by the Equity release council, formerly known as SHIP providers, carry a no negative equity guarantee.Q. How much do equity release schemes cost and how and when do you pay for them?
A. It depends entirely on the type of equity release plan and the company that is offering it. Typically an application fee may be required, and prices for this vary. The initial fee usually covers the cost of valuing your property as well as any associated administration costs.
Under FCA regulation, companies must make it clear that they charge such a fee and detail exactly how much will be charged. There may also be some legal costs involved.
Q. How can I make sure I am protected?
A. Lifetime mortgages have been regulated by the Financial Conduct Authority (Previously the Financial Services Authority) since 2004 and home reversions since April 2007. It means any company selling the plans has to conform to certain rules and regulations and, if anything goes wrong, you may be covered by the Financial Ombudsman Service. Buying through a Equity Release Council registered firm gives added protection as they have to conform to certain professional standards.
Also, make sure you work with a financial adviser who has relevant equity release qualifications, such as the CII Certificate in equity release.
Remember, taking out an equity release scheme is not simply raising some cash now, but making a financial decision that will affect you for the rest of your life, which could mean many decades ahead.
Make sure you know exactly what you’re getting into – take as much advice as you need, and don’t be rushed into making a decision.
Reference – Bl035 – Sep – 18