The Equity Release Council are predicting a bumper “rebound” as 2021 draws to a close. The latest figures suggest that the market could be on track to exceed £4 billion of activity for the year. According to FTAdviser, the figure could even edge closer to £4.5 billion.
The available product range has more than doubled in the last three years, hitting a 15-year high in 2021. There are currently 769 different plans available.
Keep reading for your guide to the main types of equity release available, as well as the pros and cons of each.
There are two main types of equity release
1. A home reversion plan
A home reversion plan provides you with a lump sum or a regular income. In return, you will need to sell all or part of your property – for less than its market value.
The benefits and drawbacks of this will need careful consideration.
The benefits of a home reversion plan
The main benefit of a home reversion plan is that you can access the money you need while staying in your own home. Having spent decades paying for, and building memories in your home, a strong emotional attachment is understandable.
You can decide how you receive the funds, depending on what you have earmarked the money for, and we can help you find the most tax-efficient ways to do this.
Reasons why a home reversion plan might not be right for you
Opting for a home reversion plan means forfeiting sole ownership of your home. On death, your property will be sold, and your provider will take back its share. The remaining amount goes to your estate once the house is sold, and this could happen quickly after your death.
You will normally receive between 30% and 60% of your home’s market value, but the older you are, the higher the percentage you are likely to receive.
2. A lifetime mortgage
A lifetime mortgage is the most popular type of equity release. You take out a loan secured against your home and the interest accrues on the borrowed amount.
When you die or enter long-term care, the initial loan amount, plus interest, is deducted from the value of your estate.
The benefits of a lifetime mortgage
You still own 100% of your home, which means you might use inheritance protection to protect a proportion of your home for loved ones.
The plan accrues interest but there are no monthly repayments to make and because you still own your home, you retain the option to sell it and move to a new property, as long as your lender agrees.
As with a home reversion plan, you can receive a one-off amount, or smaller lump sums, and use them as you wish.
Reasons why a mortgage home reversion plan might not be right for you
You’ll need to keep track of the interest that is accruing as it can build up quickly.
If you intend to leave an inheritance to loved ones, you’ll need to think about the impact equity release will have on the amount you leave behind. You’ll also need to consider the impact on any means-tested benefits you receive.
Gradual payments versus a one-off lump sum
When you release money tied up in your home you can do so in one go, or gradually.
If the money is being used for one-off events such as house renovations, not only will a one-off lump sum sound appealing, but it might also be the best choice. You’ll still need to be wary of drawing more than you need though.
Where you won’t be needing all of the money in one go – to pay for ongoing care, for example – regular payments could be far more tax-efficient than a one-off amount. Smaller payments will also make a dramatic difference to the interest that accrues.
Say you have £100,000 available but only need £5,000 in the short term, drawing down gradually means that you will only pay interest on £5,000. The additional £95,000 can remain undrawn and therefore not amassing interest, ready to be drawn from when you need the next £5,000.
The choice between types of equity release can be tough, but so too can deciding how and when to release the available funds. You will need to think carefully about what you need the money for and how much you are likely to need at any given time. Thankfully, we are on hand to help.
Get in touch
Our expert financial planners and mortgage advisers can discuss if equity release is right for you, and it is, help you manage the funds released. If you’d like expert advice before you decide, get in touch by emailing firstname.lastname@example.org or call 03452 100 100.
Equity Release will reduce the value of your estate and can affect your eligibility for means-tested benefits.