Equity Release - How much cash can you release from the value of your home?

The products share many attributes. Some, under the umbrella of the Safe Home Income Plan (SHIP) also offer guarantees. There is no monthly interest payment to be made on the loan, although certain products may involve a small peppercorn rent, and the guarantees include the right to remain in the property until death, or entry into long term care, or the sale of the house or other voluntary cessation of the arrangement (the latter normally involves sizeable penalties). A further SHIP guarantee is that there will never be a negative equity debt to your estate when the arrangement ceases. For example if house prices were to fall significantly, and if the rolled up interest exceeds the value of the property or the remaining share you still own is worth less than you were paid for it, the debt is simply written off by the lender. It follows that, in order to protect themselves against this possibility, lenders considerably restrict the amount they offer in relation to the value of the property. Furthermore, the home reversion plan deeply discounts the property value to reflect the fact that it may be many years before the lender receives any income.

Nevertheless, you continue to share in any rise in the value of your property (unless you have sold its entire value), you may be able to take extra cash advances, depending on the amount you originally took, and if you are a smoker or have a serious illness, you may be able to get a bigger payment and, last but not least any reduction in the size of your estate on final settlement as a result of using either of these two solutions will reduce your liability for IHT, but you should not do it for that reason alone as you could quite possibly give away more than any IHT you saved.

Entering into any form of equity release arrangement has long term implications for both you and your beneficiaries and you should not proceed lightly without taking independent financial and legal professional advice. You should also consider the other alternatives, such as downsizing, and selling and renting. If you fail to do so and make a mistake it will be difficult and expensive, if not impossible, to rectify it and there are often better solutions available.

The links below, which appear on each page, will take you to a series of calculators where you can compare the options and may help you to decide whether or not equity release is for you. It will also give you an indication of the initial effect on any IHT involved as well as the ultimate value of your property when final disposal is made. Please note, however, that not all equity release plans provide lump sums. Several provide income only through an annuity and you might get a better annuity elsewhere by using the lump sum method. Alternatively, it may be better for you to draw down small capital amounts to be used as income, thereby reducing the rate at which the loan rises. This is something you should check carefully with your professional adviser.

In practice, however, only Lifetime Mortgages and Home Reversion Plans are currently widely used. The Home Income plan largely disappeared with the withdrawal of MIRAS, Shared Appreciation (with the possible exception of some shared equity mortgages occasionally offered by Housing Associations and aimed at First Time Buyers rather than retirees) disappeared at the end of the 1990s due to the difficulties in securitising the loans, and relatively few people can afford even an interest only mortgage in retirement these days. So we are left with the lifetime mortgage and the home reversion plan as the only two practical options still available. Each type of product, however, includes wide variations in the benefits different lenders offer with their Lifetime Mortgage or Home Reversion Plan, such as the Open Options Plan, and you should seek professional advice from an independent financial adviser before making a decision.

The Lifetime Mortgage is available from age 55, at which point the advance would be restricted to less than 20%. At 65 this might increase to 25%, but it is unlikely that more than 50% would ever become available no matter what the age. A Home Reversion Plan is generally available from age 65 at which point you might get around 30%, increasing with age to 60% or more at age 90+. In other words, they offer a larger sum and generally work better the older you are.

The Mortgage Shop is a retired IFA that no longer gives direct advice on or arranges Equity Release. Instead, it passes your enquiry to a fully qualified and licensed professional firm in your local area
that will do this for you. This is a FREE referral service to you, without any obligation, and you are completely at liberty to negotiate with the firm concerned the terms for their advice and services. The information provided is on the basis of our understanding of UK tax law and Inland Revenue practice and is subject to change. This site is intended for persons aged 18 or over, resident or ordinarily resident, in the United Kingdom. email: bobstark@mortgagefor.me.uk

This is about Equity Release Plans. To understand the features and risks, ask for a personalised illustration. The actual APR rate available will depend upon your circumstances.

Please ensure that you check your entitlement to State Benefits, such as Pension Credits, before committing yourself. For example, the rise in capital thresholds in November 2009 completely altered the entitlement for some people. In a recent case I was able to arrange an increased pension income for a married couple, who had been told by DWP that there was no entitlement, of almost £175 per month just by using the calculator available at entitledto.com and then advising them to re-submit their claim. This altered their need for equity release.