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Equity Release

A Guide to Equity Release

 

Our Approach

Our Approach

At Absolute Finance we appreciate that every client is unique and complex, which has led us to develop a highly innovative approach to their personal requirements, in regards to equity release.

 

As retirement approaches, we often start to think about how we'll manage financially, especially if we have a small pension and limited savings. If you own your home, are over 55 and have little or no mortgage, you might be considering equity release. If so, this following literature will provide you with some basic information on how it works, and whether it's right for you.

 

This following information considers many of the different equity release options, and the structures into which you could transfer your assets, which could have lasting consequences for you and your family, and sets out why it is crucial that you make the correct choices. We can ensure that you find the right solutions to protect your assets, as well as offer you and your family lasting benefits.

 

Obtaining professional advice is essential to making an informed decision about the most equity release product.

 

At Absolute Finance we work with our clients to assist and create tailor-made equity release strategies, that meet their financial goals and needs; and we're committed to ensuring that our clients enjoy the best financial planning service available.

 

As part of our service we also take the time to understand our client's unique needs and circumstances, so that we can provide them with the most suitable equity release solutions in the most cost-effective way. If you would like to discuss the range of equity release services/products we can offer, please contact us for further information.

 

As far as possible, the following information is applicable across the UK.

 

Please note that the information contained in the sections below is to help you to think about your equity release needs. It is not designed to provide specific advice. If you are unsure of your financial position or about which type of financial product is right for you, please contact us for further information.

What is equity release?

What is equity release?

Equity release is a way that older homeowners can release cash from their home without having to move. You borrow money against the value of your home, but pay nothing back until your home is sold – either after your death or when you go into long-term care. Alternatively, you can raise money by selling your home, or part of it, but continue to live in it until you die or go into long-term care.

 

But first, there are quite a few things to consider. Equity release is a big decision and might not be the best or the only solution. If you receive state benefits, what will the impact be? If your circumstances change, will it affect your ability to move? If you have children, how will they feel about it? You may want to discuss it with them first. Most importantly, you should get specialist, independent financial and legal advice before signing up for equity release.

 

Start by thinking about other ways to raise money – perhaps by moving to a smaller property, claiming any state benefits you may be entitled to; please contact us for further information.

Who can choose equity release?

Who can choose equity release?

There are usually certain conditions that people taking out equity release schemes must meet. These will differ between schemes but may include:

a minimum age, usually 60, but some schemes may be open to people over 55
a maximum amount you can borrow or sell, for example 40% of the property value
you must own your home and it must be of a certain value
you have little or no mortgage left
you have to borrow a minimum amount of money
some companies will only accept applications from people living in freehold houses, rather than leasehold flats
some companies will only accept applications from people whose properties have been built using materials such as brick or concrete, not wood-build or prefabricated.

 

There are quite a few things to consider. Equity release is a big decision and might not be the best or the only solution; please contact us for further information.

Why choose equity release?

Why choose equity release?

There are advantages and disadvantages to choosing equity release.

 

Advantages include:
You can get a lump sum, a regular income, or both, and you don't have to move house.
A reputable plan will guarantee you'll be able to continue living in your home until you die or go into long-term care.

 

Disadvantages include:
With a lifetime mortgage, the interest is added to the amount you owe. As you are paying interest on the interest, the amount owed can grow very quickly.
You will get far less than full market value if you sell some or all of your property through a home reversion scheme.
Getting a lump sum or a regular income may affect your entitlement to means-tested benefits, now or in the future.
If you get married, enter into a civil partnership or decide to live with someone in your property after you take out the scheme, the plan may come to an end on your death and your partner may have to move out.
If you want to move to a new property, you may not be able to transfer the scheme to your new home – it depends on the scheme and the new property.
If you die soon after taking out a reversion scheme, you could have sold off your home (or a part of it) cheaply – although some schemes give families a rebate if you die within the first few years of signing up.
If you decide to repay the plan early, perhaps if you get an unexpected windfall, there could be a substantial early repayment charge. Check the details of your plan to see what this charge will be.

Other options you should consider

Other options you should consider

Raising income or a lump sum from your home is only one of the options that may be available for older home owners. Consider all your options before you make a decision.


For example:
you may have other investments or assets that could boost your income or give you the lump sum you need – please contact us to discuss your other options
you may be entitled to state benefits such as Pension Credit, Income Support, Council Tax Benefit and Attendance Allowance
consider moving to a less expensive, smaller property; Age UK has a range of factsheets on housing options
if you are struggling to pay off your debts, get advice on managing debt from your local Citizens Advice Bureau, local Age UK or National Debtline
If you need help with repairs, improvements or adaptations to your home, find out first if you can get it from your council or other agency.

Costs

Costs

Costs and fees of setting up equity release plans will vary between different providers. Ask about all fees before making any commitment.

 

Typically the costs will include:
completion, arrangement or application fees that cover administration costs. Some providers may refund this on completion
valuation fees that will depend on how much your home is worth, with higher prices for more expensive properties. Some providers may refund this on completion
solicitors' fees that cover the legal work carried out on your property. Your solicitor should give you a breakdown of the fees
early repayment charges if you want to pay off your loan early.

Repairs, insurance and other ongoing costs

Repairs, insurance and other ongoing costs

You will remain responsible for repairing and insuring the building. The scheme provider will expect you to maintain your home to a reasonable standard. If you don't, the scheme provider can arrange to do necessary repairs and you will be charged for them, or the cost could be added to the amount you owe. Remember that maintenance costs could be high. You will still have to pay Council Tax and other bills.

Commission or fee

Commission or fee

Our financial adviser can be paid by commission, one-off fee or combination of the two; you normally pay a fee directly to the adviser while a commission is paid to the adviser indirectly from the money you raise on your property. At Absolute Finance you can choose how we are remunerated:
A fee of £995 payable on completion of an equity release product. We will also be paid commission from the company that lends you money or buys your home OR
A fee of £2,495 payable on application of an equity release product and we will rebate the commission received from the company that lends you money.

 

Please contact us for further information.

Moving house

Moving house

You may want to move somewhere smaller or more suitable for your needs at a later date. Most schemes will allow the plan to be transferred to another property but this may not be the case if you are moving to retirement housing.

 

If the value of your new property is lower, you will usually have to repay part of a lifetime mortgage or part of a home reversion from the proceeds of selling your home. If you can't transfer your scheme, you would have to pay off the whole amount from the proceeds of selling your home and you might not have enough funds to buy a new home. Also, bear in mind that the income from equity release may affect your future eligibility for financial assistance with care home fees. If you release equity from your property but give the funds away, for example to a family member, it may still affect your future eligibility for assistance with care home fees; please contact us for further information.

Other changes in circumstances

Other changes in circumstances

Consider whether any other change in your circumstances may affect the plan, for example someone else coming to live with you after the plan is taken out. If a younger family member or friend moves in to provide companionship or care, the scheme would still come to an end at your death or that of your partner, and the house would have to be sold.

 

If you take out the plan as a single person and get married, enter into civil partnership or decide to live with a partner in your property later, the plan may come to an end on your death. You may be able to transfer the scheme into your joint names but if this is not possible, your spouse, civil partner or partner may no longer be able to remain in the house after your death.

Life expectancy

Life expectancy

The older you are, the larger the amount of money you are likely to receive from a scheme. This is because your life expectancy is lower.

 

If you are considering a scheme where you sell all or part of your home, get advice about what will happen if you were to die shortly after taking up the plan. Some schemes offer capital protection in the event of early death but the amount you receive may be reduced as a consequence.

State benefits and charges for care services

State benefits and charges for care services

When you consider equity release, you should check the impact it may have on any benefits you are already receiving, and be aware of the possible impact on future benefits entitlement. Many older people are entitled to, but not claiming, state benefits of all types, both means-tested and non-means-tested. Before considering equity release, get a full benefit check from an independent agency and maximise your income by claiming any benefits you might be entitled to.

 

You need to bear in mind that your circumstances may change in the future in ways that are not predictable. For example, becoming a carer, experiencing bereavement or the onset of a disability may mean that someone who is not currently entitled to benefits becomes entitled. Benefit rules may also change.

 

Even if you find that additional income or capital from an equity release scheme will reduce your benefit entitlement, you may still decide to go ahead with equity release if you will be better off overall. But make sure that the extra income from the scheme will be enough to make up for any loss of benefits and related entitlements.

 

Taking out an equity release scheme will not affect your entitlement to non-means-tested benefits. These include State Pension, Attendance Allowance, Disability Living Allowance, Carers Allowance, industrial injuries benefits, and bereavement benefits.

 

If you are receiving means-tested benefits such as Pension Credit or Council Tax Benefit, lump sum payments or regular income from an equity release scheme may affect your entitlement.

 

If you lose your entitlement to Pension Credit as a result of taking out an equity release scheme, remember that you will also lose other entitlements. For example, you would no longer have access to Social Fund grants and loans, and you would no longer qualify automatically for help with health costs, including dental treatment and glasses.

 

Income or capital from equity release scheme might also affect any charges you pay for care service; take further advice; please contact us for further information.

Inflation

Inflation

If you take out a scheme that provides a regular income, check whether the income is fixed or can be increased. If the income is fixed, it will not increase in line with inflation. If there is inflation, the real value of your income will be reduced.

Tax

Tax

The equity you release will be tax free but any income raised from investing the money may increase the amount of income tax you have to pay.

 

By reducing the value of your estate, you may be cutting Inheritance Tax bills.

Family

Family

The scheme can cut Inheritance Tax but may considerably reduce the size of your estate. You may want to discuss it with close family members. A financial adviser should be able to advise you about any tax implications.

Lasting Power of Attorney

Lasting Power of Attorney

The Lasting Power of Attorney (LPA) replaced the old system of Enduring Power of Attorney (EPA). No new EPAs can be set up after 1 October 2007, but pre-existing ones are still valid.

 

Individual lenders may or may not deal with EPA or LPA holders as bona fide representatives, so you will need to ask them about this before entering into any transaction on behalf of the donor.

 

Meaning: An LPA is a document appointing a person to act on another's behalf if they are unable to make certain decisions themselves. There are two types of LPA, a Property and Financial Affairs LPA and a Personal Welfare LPA. A Property and Financial Affairs LPA can be used even if the donor has the mental capacity to manage their own financial affairs, but it must be registered at the Office of the Public Guardian first. If you have been granted an Enduring Power of Attorney or Lasting Power of Attorney seek independent legal or financial advice regarding your status and your right to represent the donor in financial transactions. You can obtain information from the Office of the Public Guardian customer services line on 0845 330 2900.

Different types of equity release plans

Different types of equity release plans

Roll-up mortgages (loans)
With a roll-up loan you take out a loan against the value of your home. The lender gives you a lump sum of money or monthly income (or a combination of both). You do not have to make any repayments of interest or capital until you sell your home (usually when you die or move to a care home). Instead, the interest is 'rolled-up' and added to the total loan. The full amount of rolled-up interest and the loan are repaid when you sell your home.

 

How much you can borrow varies according to the company, value of the property and your age –the younger you are, the less you can borrow. This is because you are likely to live longer and the amount of debt you will accumulate will be greater.

 

Because interest is compounded on a rolled up mortgage (so you pay interest on interest), the amount you owe can grow very quickly. For example, a roll-up loan of £20,000 can more than double in just 10 years on a rate of 7.5% a year. It is important that you choose a scheme that guarantees 'no negative equity' so that neither you nor your estate will be liable for more than the value of your property. Even if the amount you borrow (plus the rolled-up interest) is more than your property's selling price, you or your beneficiaries will not have to repay more than the amount your home is sold for.

 

Some schemes also offer fixed or capped interest rates to protect against future rate increases and ensure that the loan will not go beyond a certain level but should the interest rates fall you will not benefit. A good provider will also guarantee no repossession in your lifetime.

 

Age UK recommends that you take independent financial and legal advice before proceeding. You may also consider the following points:

 

Advantages
You get a substantial sum to spend as you wish, or draw a regular income, without paying interest.
You retain full title to your property and may benefit from any increases in its value.

 

Disadvantages
Your loan debt accumulates rapidly.
Interest rates can be high because the rate will be fixed for the life of the loan –which can last decades.

 

Drawdown lifetime mortgages
In these types of lifetime mortgages, instead of taking the amount you borrow as a lump sum in the beginning, you take smaller cash amounts either when needed or on a regular basis. Because you are taking out smaller amounts of money over a period of time, your debt will grow more slowly than if you take a whole sum at the start.

 

Interest-only loans
In this scheme you take out a loan against the value of your home. You receive a lump sum on which you will have to make interest payments. You will not have to repay the capital until the sale of your home.

 

The interest rates can be fixed or variable. If they are variable and your income is fixed you may find it difficult to meet your repayments if interest rates rise. This is an important consideration for couples because if one partner dies and the surviving partner has a reduced income, she or he may not be able to afford the interest payments and forced to move to reduce or repay the loan.

 

Fixed repayment lifetime mortgages
You take out a loan that is secured on your home. You do not pay interest on your loan but agree to pay the lender, when your home is sold, a higher sum than you borrowed. The amount you will have to repay will depend on your age and life expectancy. It is fixed at the outset and it will be the same regardless of how long your mortgage lasts. But, when you die, the lender may charge interest on the repayment sum from the date you die until the mortgage is repaid.

Home reversion scheme

Home reversion scheme

With a home reversion scheme you sell your home or a part of your home to a private company called a reversion company. In return you receive a cash lump sum or a monthly income. You receive a lease giving you the right to remain in your house rent-free or for a nominal monthly rent for the rest of your life. You should check the terms of the lease to make sure you know what is expected of you.

 

When the property is sold, usually after your death, the reversion company receives the proceeds from the sale, depending on what share of your home you sold. For example, if you sold a 50% share of your home, the reversion company would receive 50% of the proceeds when it is sold.

 

If you sell only part of your home you receive a smaller cash lump sum or lower monthly income but when the home is sold you or your heirs may benefit from an increase in the value of the part of your home that you keep.

 

When you sell your home or part of your home to a reversion company you do not receive the full value that you would get if you sold on the open market. This is because the reversion company gives you the right to live in your home for the rest of your life. So you only receive a percentage of the market value. The percentage of the value you receive will also depend on your age (or in case of joint lives, the lower of the two ages).

 

Certain schemes may buy your home at a higher purchase price and in return you pay an ongoing rent while you live in your home. You would need to be sure that you would be able to continue to afford this rent payment. Age UK recommends that you take independent financial and legal advice. You may also want to consider following points.

 

Advantages
You continue to share in any rise in the value of your property (unless you have sold its entire value).
You have no ongoing repayments to make (apart from a nominal rent in some cases); the reversion company makes all its money when the property is sold.
You will know what share of your home (if not its value) you will be leaving to your family.

 

Disadvantages
You are not likely to get full market value of the share of the property you sell.
You will not gain from any increase in the value of the property, unless you have sold only a proportion of it.
If you die soon after taking out a plan, you could effectively have sold off your house (or a share of it) cheaply. Some schemes give families a rebate if you die within the first few years of signing up.
Some schemes take a long time to arrange, and may be selective about the properties they take.

Sale and rent back schemes SRB

Sale and rent back schemes SRB

Sale and rent back (SRB) schemes are usually offered to homeowners who are in financial difficulties and face repossession of their home. They are an arrangement where a firm buys your house, usually for less than market value, typically 70% to 80%, and then rents the property back to you at a market rent. You can use the cash to settle your existing mortgage and any arrears that you have while remaining in your home. Some companies may offer you an option of buying back the house later at the market value.

 

In most cases, these schemes do not guarantee occupancy for life. Your tenancy will be an assured shorthold tenancy which means that after initial fixed-term tenancy agreement you can be easily evicted and/or your rent may be increased significantly to such a level that you will not be able to afford it. For more information on assured shorthold tenancy.

 

SRB schemes are not equity release schemes. There are two main differences between them:
security of tenure –equity release will usually provide the customer with the right to live in their homes for life
in equity release schemes you usually do not have to pay rent.

 

From 30 June 2010 the SRB schemes are fully regulated. The rules imposed on providers include offering consumers a fixed-term assured-shorthold tenancy of at least five years and requiring that firms ensure that the customer can afford the deal and that it is right for them.

 

If you are considering taking out this sort of scheme get independent advice. Ask the FCA if the company you are dealing with is authorised to offer SRB schemes.

 

If you have difficulties paying your mortgage get advice. For more information about dealing with mortgage arrears see the Citizens Advice Bureau website, contact your local CAB or National Debtline. The Money Advice Service website has also a guide Sale-and-rent-back schemes that can be downloaded.

 

Note:
Following a report published by FCA in February 2012 which showed that most sale and rent back transactions were either unaffordable or unsuitable and never should have been sold, the FCA has referred one firm to its enforcement division while others have either stopped taking on new business or cancelled their regulatory permissions. This means the private sale and rent back market is effectively temporarily shut and homeowners should not be offered these schemes until further notice.

Information or advice

Information or advice

When you approach an adviser or a lender, they should tell you if they are going to give you advice or information.

 

The main difference between the two is that, if you take advice and the product is unsuitable, you may have grounds for complaint. If you don't take advice, as long as the information you were given was accurate, you will not be able to complain if you make a mistake and choose the wrong one. Your adviser has to be authorised by the FCA. Authorisation means you are protected if you receive bad advice or if your product provider or adviser goes out of business.

 

Your adviser will give you information about equity release in the form of 'key facts' documents. You will receive one for the recommended product if you take advice or one for each product if you don't. It should make it easier for you to compare different products and understand the service you will receive and how much it will cost. Make sure you read and understand it, and ask about anything that is not clear to you.

 

Choose an independent financial adviser; they have access to all the market. Also choose a solicitor who will act on your behalf only; not one recommended by the company providing the scheme.

Avoiding risk - regulations

Avoiding risk - regulations

Lifetime mortgages and home reversion schemes are regulated by the Financial Conduct Authority (FCA). Make sure the firm you buy the equity release plan from is authorised by the FCA.

 

You may want to choose a product from a company that is a member of the Equity Release Council. This is an industry body and its members agree to abide by a voluntary code of conduct. Members guarantee that you can live in your property for life, move your plan to an alternative property without penalties and never owe more than the value of your home. If you use a company that is not a member of the Equity Release Council check whether it offers similar benefits.

 

Lifetime mortgages and home reversion schemes are regulated by the Financial Conduct Authority (FCA). This means that there are rules about what providers must tell you when you take out an equity release plan. If they do not follow these rules and something goes wrong, you will have a right to seek redress through the Financial Ombudsman Scheme. Be aware that some home reversion providers do not need to be authorised by the FCA. These could be, for example, an individual person who buys all or part of your home on a one-off basis. If you take out a scheme with an unauthorised provider you will not be able to use the complaints and compensations schemes. Check with the FCA that the firm you are dealing with is authorised.

 

Always get independent financial advice from an adviser who specialises in equity release, before taking out a plan; please contact us for further information.

Equity Release Council members

Equity Release Council members

Some lifetime mortgage and home reversion providers are members of the Equity Release Council (formerly Safe Home Income Plans SHIP). The Equity Release Council members agree to abide by a voluntary code of practice which aims to ensure that member companies provide clearly explained written information about the benefits, objectives and limitations of their schemes. You will be guaranteed that you will not lose your home; your legal work will always be carried out by the solicitor of your choice; and you will be offered a 'no negative equity' guarantee.

 

Seeking legal and financial advice
Always get independent financial advice from an adviser who specialises in equity release, before taking out an equity release plan. Check with the FCA that your financial adviser is authorised.

 

Before you sign up to an equity release plan, speak to an independent solicitor. The Law Society can provide you with a list of local solicitors in England and Wales

 

In Scotland, contact the Law Society of Scotland and in Northern Ireland, contact the Law Society of Northern Ireland. You could also obtain legal advice through Age UK Legal Services.

 

If something goes wrong with your plan, contact the provider first. It will have a complaints procedure to follow. If you're not satisfied with the response, call the Financial Ombudsman Service to see if it can help.

Choosing an adviser

Choosing an adviser

You should always get advice from a properly qualified independent financial adviser. 'Independent' means they are not restricted to selling schemes from just one or two firms. Advisers at Absolute Finance are independent, and only give advice in areas that they are fully qualified in. A Society of Later Life Accredited Adviser is available to assist you with your enquiries – Nick Clemens: nick@absolutefinance.eu.

 

In choosing a financial adviser you might find the following tips and questions helpful.
Check that your adviser is authorised (the FCA can do this for you –see above).
Is your adviser independent or tied to a particular provider?
Have they passed specialist equity release exams?
What experience do they have in advising on these plans?
Did they try to get to know your circumstances and needs?
Have they covered different options not just one?
Ask questions about anything you do not understand.
If you feel rushed or pushed by your adviser or are not getting straight answers, go elsewhere.
Check documents and forms carefully before signing anything.
Do not sign up to a deal unless you are happy with it.

Disclaimer

Disclaimer

This above information contains general advice only, which we hope will be of use to you. Nothing in this leaflet should be construed as the giving of specific advice and it should not be relied on as a basis for any decision or action. Neither Absolute Finance Limited nor any of its subsidiary companies accepts any liability arising from its use. We aim to ensure that the information is as up to date and accurate as possible, but please be warned that certain areas are subject to change from time to time. Please note that the inclusion of named agencies, websites, companies, products, services or publications in this information leaflet does not constitute a recommendation or endorsement by Absolute Finance Limited or any of its subsidiary companies. Every effort has been made to ensure that the information contained in this leaflet is correct. However, things do change, so it is always a good idea to seek expert advice on your personal situation; please contact us for further information.

 

 

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