Friday 3 August 2018

Finance Fridays – Equity Release

We were working from home for last week's Finance Fridays. This week we are looking at subject you will have seen plenty of TV advertisements for if you have the television on while you are working from home – equity release. The advertisements seems to promise so much – by releasing equity in your house you afford to build extensions onto your house, go on luxury holidays and even afford to pay for your grandchildren to have private maths tuition with Carol Vorderman! It all seems too good to be true so where the catch?

What is equity release? - It is a procedure used to release some of the cash value (equity) in your house without selling it or moving out.

What types of equity release are there? - There are two main types of equity release known as a lifetime mortgage and home revision.

If you take out a lifetime mortgage it works in a similar way to a standard mortgage. You can either apply for a mortgage for the full value or just part of it. In return you will receive a lump sum amount which you can use as you wish. The repayments on the amount can either be paid monthly or left until you die. If the repayments are postponed then the amount owed and any interest accrued will have to be paid off when the policy holder dies and the property is sold.

For home reversion schemes you sell part or all of your home to the equity release provider. In return they give you a lump sum or regular payments. When you die the property is sold and the proceeds are split accordingly between the equity release company and the property owner's estate.

Who can apply for equity release? - With lifetime mortgages the minimum age is usually 55 but for home revision plans this can rise to 60 or 65. Most people who apply for equity release either own their property outright or have a very small mortgage on it. If you own the property as a couple you will need to take out a joint equity release plan.

Is it a good deal?
- Even with the increase in interest rates, which no doubt will impact on standard variable rates for mortgages, the interest rates for lifetime mortgages have never been as competitive. If you don't make repayments on a lifetime mortgage and leave the interest to accrue then over an 11 year period the amount actually owed could easily double. This could mean that when the property is sold most or all of the final selling price is handed over to the equity release company.

In home revision plans you will receive between 20% and 60% of the current market value. The actual percentage you will get depends on your age. The older you are the higher the percentage you will be offered.

Which provider should I chose? - I can't recommend a company or provide financial advice but you should look for one who is a member of the Equity Release Council. They have a number of standards which each of its members must abide by. Around 90% of equity release providers are members of the Equity Release Council.

What happens if my home drops in value when it is sold? - The problem of negative equity could arise if there is a general drop in house values or something happens to impact on the value of the property. This could be due to something such as a new busy road being approved or your property becoming part of a flood zone. In these cases the Equity Release Council state that the estate should not be liable for any more payments.

Why have they been controversial? - In the early days of equity release a number of providers had unethical sales procedures. This led to some homeowners not releasing they were handing over a proportion of their property to the company. With the high interest rates on the policies it was found that there was very left or nothing left for their families to inherit. In home revision plans the value of the share they buy has also been criticised as being too low. Another problem has been that families have not been aware of equity release plans and thought they would fully inherit a property when in fact it had already been signed away years ago.

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Finance Fridays

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