I need some cash - should I be thinking about Equity Release?

This is a question that I am often asked by clients who have limited cash resources but own a property which, particularly given current values, might be worth many thousands of pounds.

Prior to the emergence of equity release schemes, the options were very limited. Generally, the only way to realise cash from a property was to sell it and buy a cheaper property elsewhere (which is still be the preferred route for those who are wary of equity release).

What is equity release?

The concept of equity release is not new. Some of the first schemes emerged in the early 1990s but, with some justification, received a lot of bad press. Such schemes typically involved the purchase of a home income plan by the home-owner, the funds for which were raised by way of a mortgage of the home-owners property. The idea was that that the monthly cost of the mortgage would be more than covered by the income from the plan and that there would be a surplus which would supplement the home-owner’s income. Sadly, this all went wrong partly perhaps because of the financial crisis that hit the UK in 1991. In many cases the income that was generated by the plan did not even cover the monthly cost of the mortgage let alone provide any surplus for the home owner. Consequently, many elderly home owners were left in a perilous position whereby, having previously been mortgage free, were now subject to a mortgage that they could not afford to pay. Not surprisingly there was much litigation in the wake of this.

It is therefore understandable that historically there has been an uneasy feeling about equity release. It is fair to say however that the concept has moved on since those early days.

How does equity release work?

If you are aged over 55 then you may qualify. There are several schemes but broadly there are two forms that equity release takes – Home Reversion Plans and Lifetime Mortgages.

Under a Home Reversion Plan the home owner sells a share in their property to the equity release provider, so that the ownership of the property becomes shared between the provider and the home-owner. The provider may require that the legal title be transferred into their sole name, with the home-owners interest being recorded in a declaration of trust. The home owner will however have the right to live in the property for their lifetime, and this might be documented by a formal lease. The “equity release” is the sale price that the home owner receives for the share. The advantage of this plan is that the shares are fixed, and the value of the home-owners remaining equity (IE their share) will not be eroded by interest charges (as is potentially the case with Lifetime Mortgages). However, it should be noted that the price that the provider will pay for their share in the property will usually be rather less than what the share is worth at that time. Another downside of the Plan is that, by sharing the ownership with the provider, the home-owner inevitably relinquishes some control about any major decisions that will have be made about the property in the future. It is also worth noting that, in the event of the home-owners death, the provider will have conduct of the sale of the property.

A Lifetime Mortgage is very different.  It is basically a loan which will be secured against the property by way of a legal charge at the Land Registry and is very much like an ordinary mortgage except in two fundamental respects. Firstly, there is no monthly payment, and instead the interest is added to the debt. Secondly, except in limited circumstances, it does not have to be repaid until the home-owner has passed away or has moved into long term care. The “equity release” is the loan amount that the home owner receives. As the ownership of the property is not changed the home owner retains full control of the property, although does have to abide by the conditions of the loan. The disadvantage is that as time goes by, and the debt grows, it has the potential to swallow up the equity in the property. This will depend largely upon how the value of the property might change over the years. Hypothetically by the time the loan has to be repaid it may even exceed the value of the property, but, the majority of Lifetime Mortgage providers do give a guarantee that no more than the value of the property will ever have to be repaid.

 In my experience the Lifetime Mortgage is far more popular now than the Home Revision Plan.

There are all sorts of reasons why a property owner may be considering equity release. Examples include:

• To pay off an old debt
• To cover the cost of major repairs or improvements to the home-owners property
• To provide a lump sum to supplement the home-owners income.
• To provide a gift (or loan) to a young relative as a deposit towards their first home.

It is important to remember that where an equity release has been completed it will reduce the value of the home-owners estate when they pass away, meaning that those who stand to inherit will receive rather less than they might otherwise have done. This may not be a concern for everyone, but it is wise to consider discussing a proposed equity release with relatives before it is completed so that they are of it.

Furthermore, once an equity release has been completed it may place some limitations on the ability to move to a new house in the future or raise further finance against the security of the property. Most providers will consider transferring the scheme to another property, but they are not obliged to do so.

Whatever the reason, the decision about whether to complete an equity release should not be taken lightly and all other options (such as moving downmarket to release some equity) should be considered. Once the equity release has been completed you cannot change your mind. Advice should therefore be taken beforehand from an independent financial advisor and a lawyer so that a fully informed decision can then be made.

For an initial consultation or quotation regarding advice about equity release, please contact the Feldon Dunsmore team at info@feldondunsmore.com or 01926 954694.