Equity
Release Plans
Many elderly people, even before the need for long term care arises, have the bulk of their wealth tied up in their home, when what they really need is an income source. Also known as Home Income Plans, Equity Release Plans are specially designed for people who find themselves increasingly ‘house rich, but income poor’.
The aim of the Plan is to release some of the equity built up in a home, without having to sell the property. There are various methods of achieving this:
- by
remortgage annuity,
- by
a roll-over interest mortgage, or
- by the reversion sale of all or part of your property.
Remortgage Annuity (Home Income Plans)
Most schemes involve taking out a remortgage on your home, to generate a cash sum normally up to a maximum of £30,000. The sum is then used to buy an annuity, which will then give you a set monthly income for life.
The interest payments on the loan are deducted from this monthly income. You do not have to repay the capital of the loan during your lifetime. The capital will be repaid from the proceeds of the property sale after your death.
Although Home Income Plans normally provide a pure monthly income, it is possible to arrange a configuration giving a small lump sum at the outset, with correspondingly reduced monthly payment.
Like all conventional annuities, the older you are the higher the income you can expect from your capital. For this reason, the plans are more likely to be appropriate for people in their 70’s.
‘Rolled-over’ Interest Mortgage (Lifetime Mortgage)
A variation of the re-mortgage idea is to raise a mortgage where interest is ‘rolled over’ and not repayable until after the death of the homeowner(s) – from the proceeds of the property sale.
The maximum loan available is determined by the age of the homeowner, but will rarely be above 25% of the property for borrowers aged up to 71. The interest rate is fixed for the duration of the loan.
A big advantage of such a scheme is the guarantee that no matter how long the homeowners live, there will be no negative equity – the loan plus rolled-up interest will never be greater than the property's value on death.
The disadvantage, however, can be that compounding high fixed interest changes (a current example is 7.79%) over a long period could potentially wipe away any of the property asset – particularly if house prices flatten or do not rise. An example would be £100,000 borrowed at 7.79% per annum would leave the borrower owing £107,790 in the first year, with 7.79% then applied to the compounded amount each year. Thus, over 19 years the amount to be paid back could balloon to £415,000! Clearly, the shorter the anticipated borrowing period, the less the effect of compounding interest would be.
Reversion Sale
This involves selling all or part of your home to a Reversion company whilst retaining the right to continue living there. In return you receive a cash lump sum or a monthly annuity income. You continue to live in your property rent-free or at a nominal £1 a month for the rest of your life.
When the property is sold after your death, the reversion company will receive the proceeds of sale pertaining to the percentage of property you sold. Your estate will then benefit from the value of the remaining share of the home.
It is important to note that when you sell your property to a reversion company, it will not be at full market value – as you will be enjoying the right to live in the property for the rest of your life and you may forfeit any benefits from future rises in house values.
As with annuities, the older you are the more you can expect – and women will get more than men. As a general rule of thumb, the sale could realise 35% less than true market value and will rarely be more than 60% – even if you are over 80.
Reversion sales need very careful consideration of all the issues involved in placing part of your property in someone else’s hands.
We would strongly advise independent financial or legal advice if you decide to pursue this option and, indeed, all the other Equity Release schemes described in this section.
‘Let to Buy’ Mortgages
There is another method which will allow you to take advantage of the value held in your current property – without having to sell any part of it! If you are prepared to move to a smaller, less valuable property, you could let out your larger property to tennants.
‘Let To Buy’ mortgages are designed for property owners to borrow money with which to buy a new home, whilst still retaining their existing home as a let property. Lenders will normally be prepared to offer a mortgage on the new home provided that the original property’s rental income will be at least 130%–150% of the required new mortgage payments.
You would be well advised to research the local rental market very carefully, before considering ‘Let To Buy’ as an appropriate strategy for boosting your income.
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