Considering Equity Release in 2010? Equity Release Questions Answered.
Christmas is in full swing and trees are filling up with presents as consumers make the most of the last weeks of 15% VAT. In January, VAT will return to 17.5% and, despite forecasted improvements in the UK economy in 2010, many homeowners might be looking for other ways to supplement income like equity release.
Taking out an equity release scheme is a major commitment that requires a lot of consideration and discussion. Just last week it was reported that 40% of equity release customers were taking over six months researching the details of such schemes.
If you are considering an equity release plan to help you start 2010 with financial freedom it is likely that you are going to have a lot of questions. We have decided to answer some of the most popular ones for you.
Is equity release right for me?
This is a question that has different answers from person to person. What we will suggest though is to seriously consider all other options available to you. Where equity release might be ideal for some, for others it might be more beneficial to down-size your home. We will discuss alternatives with you to make sure that an equity release scheme is right for you.
How much can I borrow?
Much like question one, the answer to this question varies from person to person. There are some guidelines, like your age affecting how much equity you can release, as will the value of your home. You have to be over 55 years-old and your home must be worth at least £70,000 to be considered for an equity release scheme.
What should I look for when seeking equity release advice?
Make sure your provider is associated with Safe Home Income Plans (SHIP) or those that adhere to similar guidelines because these provide a code of good practice for the equity release market. They will ensure that if you take out a lifetime mortgage you will have the benefit of a no-negative equity guarantee – meaning you will never owe more than the value of your home.
What is the difference between interest roll-up and home reversion plans?
An interest roll-up equity release scheme, like a lifetime mortgage, will allow you to take out a lump sum that will be repaid, along with all the interest upon the sale of the property or should you go into long-term care. It allows you to continue living in your home and own it, therefore benefitting from any house price increases. A home reversion plan will see you sell a portion or your entire home to the lender but you will continue to live there rent free. These schemes allow you to benefit from more equity but, depending on the portion of the property sold, any future increases in value will be shared with the lender.
Shall I get a lump sum or regular payments?
It is possible to benefit from both with a lifetime mortgage. Releasing the equity as a lump sum will help people needing to release a large amount quickly but this will see the interest accrue quickly and once it has gone, it won’t be possible to get it back. Taking regular payments from your lifetime mortgage will see the interest build at a slower rate and it works like a resource you can dip into when you need it.
What is compound interest?
Compound interest is the interest charged on interest, usually meaning that the amount you borrowed will have doubled in ten years. This affects lifetime mortgages and is one of the major disadvantages.
How will it affect the family and inheritance tax?
Naturally, an equity release scheme will mean there is not as much inheritance left behind for your family. This is why it is important to discuss equity release with your children so they are aware of how it will affect them. However, an equity release scheme will reduce your exposure to the 40% inheritance tax. This is because it is seen as a debt against your estate. The threshold for inheritance tax has been frozen at £325,000 until the end of the financial year 2010-11.
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My husband and I are 66/65 years old. We live in a 1930s bungalow in Twickenham (London borough of Richmond). The house was valued recently at about £ 320,000, and we currently have an interest only mortgage of £ 100,000. If we wanted to take out a lump sum of £ 20,000, how would this effect the value of our property? And could we repay the euqity release loan after e.g. 10 years? (I will eventually inherit my mother’s house in Germany).
Thank you very much for your answer.
Sincerely
U.Runde
[Reply]
admin Reply:
March 11th, 2010 at 4:47 pm
Dear Ursula,
One of the conditions of equity release is that you use some of the money you receive to pay off any outstanding mortgage you have against the property. Therefore, you would need to take out a lump sum of £120,000. To remain in your house and repay the loan you would need to take out a lifetime mortgage. However, you would not be able to raise sufficient funds to meet your objectives. A home revsion plan may raise more but would not match your requirements. If you would like to discuss this option in more detail please contact one of our fully-qualified advisors on freephone 08080 10 10 10, or via our website http://www.agepartnership.co.uk by requesting a callback.
Kind regards
The Age Partnership Team
blog@agepartnership.com
admin
[Reply]
Ursula Runde
8 Mar 10 at 6:43 pm