8th February, 2016
If you are over 55 you might be thinking about raising money using an equity release scheme against your house to supplement your income and as such there will be much to consider. Property solicitor Claire Simmons has some tips.
In the current economic climate where property values have rocketed and there is a low return on low risk savings such as cash, a number of pensioners are struggling to make ends meet. One option which is sometimes considered is to convert the capital value of your house into cash.
Before considering such a step, it is important that you take independent advice from a financial adviser.
There are two types of equity release schemes: home reversion plans and loans. A home reversion plan involves selling all, or a percentage share, of your house, but you continue to live in it.
The property would not be sold until either your death or until such time as you move into a care home. At that point, the lender would take its share of the sale price. If you have sold all of your interest in the property, the lender will keep all of the profits.
This is something of a drastic measure as it involves the sale of the family home to a third party and is potentially only viable for older people over the age of 80 years of age due to the fact the price offered for your home depends on how long the lender may have to wait before getting its money back from the sale of the property. The price offered for your property may be well below the current market value, particularly if you are more recently retired and are likely to have a god few years left.
The lender will allow you to remain in your house for the rest of your life, even if you have sold all of your interest in it. However, you will still be responsible to maintain the property, even though you no longer own it and there is also the possibility of being charged a notional rent.
The second form of equity release is a loan or mortgage taken out against the value of your house. Roll-up mortgages involve taking out a loan on which no interest or capital is repaid until the house is sold.
The interest on the loan, which is usually set at quite a high level, is rolled up and added to the capital value. Compounding the interest in this way means the total loan can increase at an accelerated rate over the years. People tend to think they are only paying the agreed rate of interest, forgetting the sum they pay interest on will in fact increase each year. The alternative is an interest-only loan where you make interest payments but the capital does not have to be repaid until your house is sold.
With any form of equity release scheme, so long as you and your beneficiaries are aware of the price you are liable to pay for an equity release arrangement, then it could help to enhance your quality of life now by using some of the capital in your home.
However, this will mean leaving a reduced amount to your beneficiaries and you should always consider speaking to them to ensure that there are no surprises and to discuss cheaper alternatives such as downsizing to another home. However, this may not be an option for you if you don’t want to move.
If you are considering taking out an equity release plan, you should check that the plan is approved by the Equity Release Council (ERC) which has a code of conduct to help ensure your financial safety. You should also check your financial adviser is registered with the Financial Conduct Authority.
Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.
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