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Page 10: Equity Release.

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This is one of a whole range of new pages introduced into
the Surgery in the summer of 2005.

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Equity release schemes give older home owners a way to turn some of the value of their homes into cash - a lump sum, regular extra income, or sometimes both. There are different names for different types of scheme, including:

  • Rolled-up interest loan,
  • home reversion scheme,
  • home income plan.

Equity Release Described

When you take out any type of equity release scheme, you use part of the capital that is tied up in the value of your home to raise extra income or a cash lump sum, or both. You keep the right to live in your home for the rest of your life. There are many reasons why you may be thinking about equity release: Your home may be your most valuable possession and investment, but you may be asset rich and cash poor, i.e. living in a valuable property, with the mortgage paid off, but surviving on a relatively low income.

If you have been retired for some time you may find that your income and savings do not meet all your financial needs. Your day-to-day living costs may have gone up while your income has stayed unchanged, or gone down, as a result of inflation or low returns from investments or savings.

You may want to get hold of a cash lump sum to pay for repairs or adaptations to your home, or to replace a car or to pay for 'extras' like holidays. You may want to raise some cash to help your children or grandchildren. Turning some of the value of your home into cash can help pay for any of these things - cash raised through an equity release scheme does not have to be spent on your home or used to buy an annuity.

But remember, once you spend this money, it has gone, just as if it had been any other kind of savings or income. You need to consider very carefully just how urgent your financial needs are, and whether an equity release scheme is the best way of solving the problem. Any scheme you take out will have an effect on the value of your home and on the value of your estate when you die. More information is given on this later.

Please read on.

Qualifying for an Equity Release Scheme

A number of conditions have to be met before you can take out an equity release scheme. These vary between the different companies providing equity release schemes, but will usually include some of the following points.

The main condition relates to your age. Different companies offering these schemes have different minimum ages. The qualifying age for some schemes is 55, but many require that you are 65 or even 70. You will need to contact each company individually to find out their rules.

Please read on.

You need to own your own home and will normally have paid off any previous mortgage. Sometimes a very small outstanding mortgage may be cleared as part of one of these schemes. Other conditions could relate to the type of property: Some companies don't accept flats, for example. Freehold properties will normally be acceptable, and leasehold properties may be acceptable as long as at least 75 years of the lease is remaining.

The property may have to be worth a minimum amount and varies from scheme to scheme but is usually at least £40,000. The property will also need to be in reasonable condition.

If you qualify, the next step is to consider the differences between the main types of scheme - lifetime mortgages and mortgage schemes. Reversion schemes are based on selling all or part of your home. Mortgage schemes are based on raising a loan against the value of your home.

Please read on.

Reversion and Mortgage Schemes:

Lifetime mortgages

With this type of scheme you borrow money from a bank, building society or other lender, and give this lender a mortgage over your home.

Rolled-up Interest Loans

With a rolled-up interest loan, sometimes just called a roll-up loan, you take out a loan against the value of your home. You do not pay off any interest or capital until your property is sold. The interest builds up year after year and is added to the amount that you borrowed, and is paid off when your home is eventually sold. A rolled-up interest loan should usually be based on a fixed interest rate rather than a variable one. This protects against any interest rate increases in the future. This type of loan can be risky, as the amount you owe can mount up very rapidly. It can be dangerous: If the loan runs for a long time you could end up owing more than your home is worth. It is therefore important to look for a scheme which guarantees that you can never owe more than the value of your property. This is often called a "no negative equity" guarantee. Any guarantee of this type needs to be checked out very carefully. Always get independent financial advice if you are considering taking out a rolled-up interest loan.

Interest-only Loans

With an interest-only loan, a bank or building society lends you an amount of money against the value of your home, giving you a lump sum. You then make monthly interest repayments, but don't have to pay back any of the capital until the house is sold. Not all banks and building societies offer interest-only loans; you may have to shop around. Moneyfacts magazine provides details of financial organisations offering interest-only loans. This magazine is only available on subscription, although you can get single copies direct from the publisher. You could also ask at your local reference library to see if they keep copies.

Home Income Plans

A home income plan is when you buy an annuity using money raised through taking out a mortgage against your home. This provides you with an income for the rest of your life. Home income plans became less popular with the withdrawal of special MIRAS (mortgage interest relief at source) tax relief in March 1999. This change in the system means people now taking out a home income plan receive less income than those who took out the plan before March 1999. (People who took out home income plans before March 1999 still get this tax relief.) The withdrawal of MIRAS, together with lower annuity rates at the moment, means there are now fewer providers of home income plans. Home income plans tend to be more suitable for older people (for example those over the age of 80) who will receive a higher annuity due to their shorter life expectancy. With a home income plan you still own your home, but take out a mortgage against it, usually up to a maximum of 75% of the value. The money raised is used to buy an annuity, which then pays out a regular monthly income. Interest payments on the loan are deducted from your annuity payments before you receive them. When you (or the surviving partner of a couple) die, the house will be sold and the amount you borrowed will be repaid. Anything left over will go into your estate.

Some home income plans also offer the option of receiving a cash lump sum in the early stages, although this will reduce the monthly income you receive. It is recommended that you only take out a home income plan which offers a fixed mortgage interest rate. With a varying interest rate your monthly income will go down when interest rates are high. This is because interest is taken away from your income before you receive it.

Please read on.

The Home Improvement Trust

If you want to release some of the value of your home so that you can pay for repairs, improvements or adaptations to your home, a "not for profit" organisation called the Home Improvement Trust may be able to help you. The Trust has set up a scheme called "Houseproud" which helps older home owners repair, improve or adapt their homes so they can live there safely and independently. "Houseproud" aims to make equity release schemes more accessible to older people. It has links with all banks and building societies that provide low-cost loans to older people, secured against the value of the home. The Home Improvement Trust acts as an impartial "go-between" and arranges property valuation, as well as liaising with the bank or building society on your behalf.

A number of different equity release schemes are available through "Houseproud", but all the banks and building societies involved provide a written guarantee of no repossession, while the original borrower remains in the house. As a safeguard, the Home Improvement Trust arranges for the borrower to receive advice from an Independent Financial Adviser, free of charge, and provides a full written analysis of all the costs involved, before any financial commitment is made. The trust works closely with local home improvement agencies (HIAs) in England, Wales and Scotland. HIAs provide older people with help and advice on repairs, improvements and adaptations, and are often known as Care and Repair or Staying Put schemes. As well as providing advice and information, these agencies will organise and supervise the work being done, and can offer more guidance on your financial situation. The Home Improvement Trust freephone helpline: 0800 783 7569.

Please read on.

Reversion Schemes

With this type of scheme you sell all of your home, or a proportion of it, to an investment company. While you no longer fully own your home, you continue to live there as a tenant for the rest of your life. You will live in your home rent-free, or you may have to pay a nominal rent, perhaps £1 a month. If a scheme is purchased jointly, both partners have the right to live in the house for the rest of their lives, even if one partner should die. You can choose to receive a cash lump sum, or a monthly annuity income, or both. When you take out a reversion scheme you will not receive the full "market value" of the property, but a percentage of it according to your age and sex. The older you are the more you will get, and men will get more than women because of their lower life expectancies. When the property is sold on your death, the investment company receives a share of the proceeds, in proportion to the amount of the property you sold to them. If you sold them the whole property they will get all of the proceeds, or if you sold them a 75% share of your home they will receive 75% of money resulting from the sale. Remember that if you sell all of your home, and it becomes more valuable in the future, the increase in value will benefit only the investment company. If you retain a share, your estate will benefit from part of any increase in the value of your home.

Please read on.

Getting Advice

If you decide that you want to take out an equity release scheme, your first step is to decide whether you want to find a scheme via an independent financial advisor (IFA), or want to arrange a scheme yourself directly with a company. If you decide to work with an IFA it is important to find one with experience of all the different schemes on offer. He or she should be able to compare the different schemes and advise on the credibility and financial stability of the providers of the schemes and of any investment that you make. You may need to "shop around" to find an IFA with the knowledge you need, so speak to a number of different advisers and ask them about their qualifications and experience.

If you are claiming any income-related benefits, such as Pension Credit or Council Tax Benefit, it is important that you make sure that the adviser understands what impact your taking out an equity release scheme would have on your entitlements. If a regular income, or lump sum, from an equity release scheme meant that you would no longer be entitled to these benefits the financial advantages of taking out this sort of scheme could be cancelled out. So it is therefore very important that you check that any potential adviser is familiar with the workings of the welfare benefit system. Help the Aged Equity Release is a service which provides free independent financial advice on finding a suitable equity release scheme. A specialist adviser will discuss your circumstances and requirements with you, and will then make recommendations as to the best equity release options for you, drawing from a panel of equity release providers. This may include a recommendation that equity release is not the right solution for you, given your current circumstances. For more information on this free service contact:

Help the Aged Equity Release,
OX29 4BR

Tel: 0845 2300 820.

The IFA promotion hotline can give you the names of your nearest independent financial advisers:

Tel: 0800 085 3250.

To check that your financial adviser is properly authorised, contact the Financial Services Authority who hold a central register of all authorised financial advisers:

Tel: 0845 606 1234.

If you decide to arrange a scheme yourself, you will need to approach a number of providers for details of their particular scheme. Get details of a wide range of scheme so that you can see how they compare. You will have to work out the pros and cons for yourself. Remember that each firm will be "selling" the benefits of their own scheme, and will not be pointing out any disadvantages. Even if you are arranging a scheme yourself, it is good idea to get independent financial advice before making a final decision.

However you arrange a scheme, it is vital that you get independent legal advice before signing any agreement. You must have a solicitor who can check out the agreement for you and advise you of its implications. Choose a solicitor who will act on your behalf only, not one recommended by the company providing the scheme.

If you do not already have a solicitor, your local library and some Citizens Advice Bureau may be able to give you a list of solicitors and the areas of law they specialise in. Alternatively, go to a solicitor who has been recommended by family or friends.

Never enter into any agreement without a full understanding of all the implications. It is essential that you get independent financial and legal advice before taking out any type of equity release scheme.

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DIY Equity Release

If you do decide not to use an independent financial adviser you will need to gather information on a range of equity release schemes yourself. As mentioned previously, we suggest that you obtain information from a number of companies so that you can compare the benefits on offer. It is also strongly recommended that you take independent financial and legal advice before entering into any agreement. SHIP (Safe Home Income Plans) can supply you with a list of their members. There are 18 firms signed up to the SHIP Code of Practice.

Contact SHIP on 0870 241 6060.

Moneyfacts magazine also lists details of a wide range of equity release schemes.

Please read our other pages.

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