Home Equity Release
What is Home Equity Release?
Equity release is a means of retaining use of your house or other object which has capital value, while also obtaining a lump sum or a steady stream of income, using the value of the house.
The income-provider must be repaid at a later stage, usually when you die. Thus equity release is particularly useful for elderly persons who do not intend or are not able to leave a large estate for their heirs when they die.
Types of Arrangement
Lifetime mortgage: A loan secured on the borrower’s home is made. Compounded interest is added to the capital throughout the term of the loan, which is then repaid by selling the property when the borrower (or borrowing couple) dies or moves out (perhaps into a care home). The borrower retains legal title to the home whilst living in it, and also retains the responsibilities and costs of ownership.
Interest only: A mortgage is made, on which the capital is repaid on death. Interest payments are paid whilst the borrowers remain in the property.
Home reversion: The borrowers sell all or part of their home to a third party, normally a reversion company or individual. This means all or part of their home belongs to somebody else. In return, the borrowers receive a regular income or cash lump sum (or both) and they continue to live in their home for as long as they wish.
Shared appreciation mortgage: The lender loans the borrower a capital sum in return for a share of the future increase in the growth of the property value. The borrowers retain the right to live in the property until death. The older the client the smaller the share required by the lender.
Home income plan: A lifetime mortgage where the capital is used to provide an income by purchasing an annuity often provided by the lender, which is often an insurance company.
It can provide a lump-sum of tax-free cash or a steady income (annuity), which can be index-linked, for the rest of your life.
It can reduce the amount of inheritance tax paid by your estate.
The no negative equity guarantee (NNEG) protects the borrower in the event of a downturn in the housing market.
If interest rates fall, borrowers are free to refinance their mortgages at a lower cost with other providers.
It may decrease the amount of money your family will inherit upon your death – assuming the value of the property grows at a slower pace than the interest rate on the mortgage.
It may reduce the amount that you can bequeath to charity.
In the UK, it may impact any means tested benefits that the borrower may be entitled to.
It’s far more expensive than selling the property to release equityThe UK Equity Release Market
This is basically made up of two types of equity release plan. The most popular plan is a lifetime mortgage – where the homeowner retains ownership of the property but the property is charged with the repayment of a loan or mortgage, which accrues rolled up interest over the period of the homeowner’s lifetime. To help customers decide whether equity release is right for them, a number of companies provide a free equity release calculator to show a rough estimate of the amount of equity that could be released.
The other type of plan is a reversion plan – where the homeowners sells all or part of the property to the equity release provider in return for a right to remain there rent free.
The UK equity release market is now fully regulated. Both lifetime mortgages and home reversion plans now fall under the remit of the Financial Services Authority (FSA). Prior to FSA regulation, many lenders signed up to SHIP, a voluntary code of conduct that provides a number of guarantees.
SHIP (‘Safe Home Income Plans’) was formed in 1991 in an attempt to improve the equity release market and its previous poor reputation. The SHIP guarantees include a guaranteed right to remain living in the property which is the subject of the equity release, either for life or until entry into long term care. In addition there is a vital No Negative Equity Guarantee – which essentially guarantees that the amount to repay the equity release plan on death or entry into long term care can never exceed the value of the property itself, and so no debt can ever be left behind for beneficiaries of the equity release borrower.
The current members of SHIP include Aviva, Hodge Equity Release, Bridgewater, Stonehaven, New Life, Just Retirement, LV=, More 2 Life and Godiva.
Whilst a number of equity release providers, most notably Prudential, exited the market in the wake of the Credit Crunch, this trend has been reversed since the end of 2010, with a number of these companies – including More 2 Life, New Life and Stonehaven – keen to attract new customers once again.
In 2010, around £800 million of equity was released by UK home owners using regulated equity release.
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