Essentially equity release is when a lender will offer you a certain sum of money known as a “lifetime mortgage” which will be based on the equity (difference between what the property is worth and what you owe on it), the older you are the sooner the lender will expect that you will die, hence the older you are the higher the percentage you will be offered. Lenders will be unlikely to give you details until approached, this is because they seek to secure the highest percentage of the home for the least money.
When you die, or go into long term care the property will be sold and the loan will be repaid to the lender, typical interest rates for the loan are anything from 4 – 10%, assuming that the property will not go up in value as fast as this means that in effect the lender owns more and more of your property every year. When the property is sold the lender may well receive the vast majority, or possibly all of the money it sells for. If there is a shortfall, and the loan is higher than the sale price the lender cannot pursue the borrower for the difference, this is why lenders are so keen for borrowers to spend money on their home building extensions etc as it protects their long-term interests.
We would never suggest you take advice from the lender themselves, they may seem unbiased and extremely helpful – but remember they are a business who want the maximum share of your home for the least money and as such their advice could never be treated as impartial, no matter how it is presented. Rest assured if you enquire they will be in touch with you, they can be very, very persistent.
Equity release loans are most suitable if want to live in your property for the rest of your days and do not have anyone to leave it to, the stark truth is:-
♦ If you were to go into care then the council would sell the property from under you to pay towards your care costs, or
♦ Should you die while living there (and have not made a will determining your wishes) then the state will sell it all and keep the money.
If you are in either of these situation you may as well have some money now and enjoy yourself.
Conversely, if you have dependents that would expect to inherit then be aware that their inheritance will diminish greatly as the lender effectively owns more and more of their property every year. In practice the best solution is to avoid these companies altogether and simply sell your descendants the property for the level of loan you were after – this does two things:-
♦ Consider your estate regarding inheritance tax – If they buy the property and rent it back to you (make sure you have a legally binding rental agreement done by ourselves or a solicitor) then because you do not legally own the property it could not be included in your estate.
♦ Likewise, if you were to go into care there is no property for the council to grab (please note that if you transfer just before you go into care the council could cry foul, apply to the court to reverse the sale, then grab the home).
If your dependents are unable to raise the funds then instead of taking on a debt that will erode your asset why not simply sell it and buy something cheaper or more suitable. Whatever the course you decide to take we would strongly suggest you take independent financial advice from a specialist you can trust or someone at your bank.
How we can help
Lestons are not registered financial advisors and can therefore not give specific advice, we can however approach various equity release companies on your behalf and present you a comparison report so that you can make an informed decision. In any case we strongly suggest you take independent financial advice from an independent professional financial advisor, we have a panel of approved advisors which we could direct your enquiry to, if so instructed.
1.24