Equity release
Articles:
AN INTRODUCTION TO EQUITY RELEASE
With the UK economy struggling to lift itself out of recession more people are releasing cash from their home by way of equity release (“ER”). There are two main types of schemes: lifetime mortgages and home reversion plans. With a lifetime mortgage the homeowner takes out a mortgage against the property which is repaid when the homeowner dies or no longer needs a home. The most common are “standard roll up” and “flexible drawdown”. With a home reversion plan the homeowner sells all or part of his property to a reversion company.
The main attractions of ER schemes are, they provide a lump sum and/or an income, it is not necessary to move house and it can cut the inheritance tax bill. Also, money released through ER is free of tax (although if the money is invested, the income will be taxable). Each scheme has advantages and disadvantages.
John aged 70 and his wife Mary aged 68 had a mortgage outstanding of £50,000 on an interest only basis and no means of paying off the capital. John was still working as a builder. He was concerned he would never be able to repay the capital outstanding on the mortgage and wanted to retire to enjoy some quality time with Mary whilst they were still in good health. John was worried that if he borrowed money secured on his home, his children would lose their inheritance. With their adviser they considered options including downsizing to a smaller property or asking family members for help. John and Mary had lived in their house for 40 years and did not want to move from their home where they had made many friends over the years. Their children had their own homes and financial obligations and were in no position to help.
John and Mary had a meeting with their financial adviser. In addition to raising £50,000 to pay off their mortgage, the couple wanted to know if they could borrow more money in the future should they wish. They are considering a world cruise and would also like to help their grandson get on the property ladder. They were recommended a flexible drawdown mortgage scheme which enabled them to raise an initial amount to pay off their mortgage with a reserve facility available to obtain further funds as and when required in the future. This way, the couple were being charged interest on the funds actually drawn down as and when required. John and Mary paid off their mortgage and are looking forward to spending more time together. They plan to help their grandson with a deposit for his first home and recently booked their Caribbean cruise.
There are many legal and financial issues to consider when taking out an equity release plan.
Please contact Solicitor and Independent Financial Adviser Michael Stennett on 020 8920 3190 if you have any questions to ask about this topic.