Equity release explained

When we say ‘equity release’ we are most often referring to either lifetime mortgages or home reversion plans.  These are schemes by which people are able to get hold of some of the equity in their house, without having to move out of the house.

•    Lifetime Mortgage – you borrow against your house. You might pay the interest, or, more commonly, the interest rolls up, and when you die or sell the house, you or your estate have to settle the debt. The issue here is to ensure that you understand the maths and the effect of compound interest.  Adding interest to the amount you owe will reduce the remaining equity in your home. If you live a long time, or if house prices fall, there may be no equity left for your heirs to inherit.

•    Home Reversion Plans – you sell some or all of your property to an investment fund. You get cash and live there for the rest of your life, but there may be restrictions on moving. (For example if you sold your home fully to a scheme then they might want to ensure that the property you want them to buy meets their requirements. This may prevent you making the move that you would like). Make sure you understand ALL of your rights and responsibilities, and any restrictions that you might suffer.

In both types you are normally responsible for the upkeep of the property, including expenses.

These methods of equity release can be very valuable as a method of funding your retirement but you should never enter into any of these arrangements without talking it through with a financial adviser. A good adviser will treat equity release as a lart resort and consider options like government grants, state benefits, downsizing, inheritance tax advice, investment planning, drafting a will – all these can be important for a proper retirement plan.

Due to scandals with equity release in the past, some of the providers set up Safe Home Income Plans (SHIP). According to SHIP they are “dedicated entirely to the protection of planholders and promotion of safe home income and equity release plans.”  All memebers of ship abide by their code of practice which, amongst other things has a no negative equity guarantee. View the Safe Home Income Plan website.

There is some pretty good information in the FSA factsheet on equity release.