A Guide to Equity Release

If you are over 55 and own your own home, you may be considering equity release, as it can provide you with a steady stream of income, a lump sum, or both. Equity release makes it possible to obtain additional income using the value of your house and is typically available for those who are retired and are living on a pension, generally over the age of 55. This guide will help you better understand equity release schemes, and will also make it easier to decide if you should enter one.

What is Equity Release?

Equity release schemes allow you to obtain income from your home, while retaining the use of your house for the rest of your life. They are designed to release the equity (cash) tied up in your property, and have no fixed term.

Equity release schemes have clear benefits for some people, but are not suitable for everyone. They can provide a lump sum or steady income, and can reduce the amount of inheritance tax you will pay on your estate. However, equity release schemes become disadvantageous, and expensive if your circumstances change, they may affect your entitlement to state and local authority benefits, and they can also decrease the money your family will inherit upon your death.

The UK equity release market is largely made up of two types of equity release arrangements, lifetime mortgage and the home reversion plan. Before starting an equity release scheme, you should consider which equity release plan best suits your specific needs.

What to Consider Before Entering into an Equity Release Plan?

It is important to think about other options that could help you financially before choosing an equity release plan. Here are some options that you should consider:

• Claim any state or local authority benefits you might be entitled to
• Check  if your local authority can help you pay for essential home improvements
• Trace pensions you may have lost track of
• Use your savings, or sell your investments
• Downsize – Consider buying a smaller and cheaper home

How Does Equity Release Work?

Equity release schemes basically allow you to use the value of your home, and ensure at the same time that you do not have to move out. The two most popular equity release arrangements in the UK are lifetime mortgage and the reversion plan.

With lifetime mortgage, you take out a loan secured against your property, and with a home reversion plan, you sell all or part of your home in return for a lump sum, regular income, or both. Equity release is particularly suitable for senior citizens, who are unable or do not intend to leave a large estate for their heirs when they die.

You are more likely to be able to enter an equity release scheme if you have no mortgage or if the amount of your mortgage is small. It is always important to consider other options before entering an equity scheme, and to choose one that is suitable for your needs, in order to truly benefit from it.

What next?

• Thinking about combining equity release with an IHT Trust? Read more about inheritance tax.
• Not sure if equity release is for you? Contact Square One for independent financial advice.