1. If your client retired and living on their pension, they may be finding money is a bit tight. If they own their own home and are in their mid-50s or over, you may be thinking about equity release because it could provide them with a lump sum or additional income. You might also consider equity release for them for tax-planning reasons.
2. Before considering equity release it’s important to check whether there are other ways you could meet your client’s financial needs before choosing an equity release scheme, such as claiming any benefits they might be entitled to; and/or advise that they sell up and buy somewhere smaller and cheaper (downsize).
3. Equity release is a way of getting cash from the value of their home. These schemes can be helpful in certain circumstances but are not suitable for everyone. For example, they can be expensive and inflexible if your client’s circumstances change in the future and may affect their current or future entitlement to State benefits.
4. Your client will most likely need to have paid off their mortgage, or have a very small outstanding mortgage to qualify for an equity release scheme.
5. There are two main types of equity release scheme: lifetime mortgages; and home reversions.
6. With a lifetime mortgage, your client takes out a loan secured on their home.
7. This mortgage may be:
• A roll-up mortgage (rolled up means interest is added to the loan – for example, each year). They get a lump sum or regular income and are charged a monthly or yearly interest which is added to the loan. The amount they originally borrowed, including the rolled-up interest, is repaid when their home is eventually sold.
• A fixed repayment lifetime mortgage. They get a lump sum, but don't have to pay any interest. Instead, when the home is sold, they have to pay the lender a higher amount than they borrowed. That amount is agreed in advance. The lender uses this higher sum to repay the mortgage when their home is sold.
• An interest-only mortgage. They get a lump sum, and pay a monthly interest on the loan, which can be fixed or variable. The amount they originally borrowed is repaid when their home is eventually sold.
• A home income plan. The money they borrow is used to buy a regular fixed income for life (an annuity). This income is used to pay the interest on the mortgage and the rest is theirs. The amount they originally borrowed is repaid when their home is eventually sold.
8. Some lifetime mortgages include a shared appreciation element. This means the lender has a share in the value of their home.
9. When taking out a lifetime mortgage, your client can choose to borrow a lump sum or to opt for a drawdown facility. This is suitable if they want to take occasional small amounts rather than one big loan, as it means they only pay interest on the money they actually need.
10. As with a conventional mortgage, your client borrows money secured against their home. The home still belongs to them. Apart from roll-up schemes and fixed repayment lifetime mortgages, they will have to pay interest on the loan every month.
11. When your client die or moves out, the home is sold and the money from the sale is used to pay off the loan. Anything left goes to their beneficiaries. If there is not enough money left from the sale to pay off the loan, their beneficiaries would have to repay any extra above the value of their home from their estate.
12. To guard against this, most lifetime mortgages offer a no-negative-equity guarantee. With this guarantee the lender promises that your client (or their beneficiaries) will never have to pay back more than the value of their home - even if the debt has become larger than this.
13. Is it right for your client? It depends on their age and circumstances. For example:
• With a roll-up mortgage the interest your client owes can grow quickly. Eventually this might mean that they owe more than the value of their home, unless they have a no-negative-equity guarantee.
• A fixed repayment mortgage becomes a better deal if your client lives much longer than the lender thinks they will. But if the home is sold much earlier than they planned, they will get a worse deal.
• An interest-only mortgage with variable interest rates may not be suitable, because the interest rate may rise faster than your client’s income.
• A home income plan only results in a small income after paying interest. The FSA says it is only suitable if your client is older, perhaps around 80.
14. With a home reversion, your client sells all or part of their home in return for a cash lump sum, a regular income, or both. Their home, or the part of it they sell, now belongs to someone else, but they are allowed to carry on living in it until they die or move out.
15. A company either buys your client’s home or a part of it, or arranges for someone else to do so. In return they get a cash lump sum or an income. If they get a cash lump sum you should talk to them about investing it to provide an income.
16. They’ll usually get between 35-60 per cent of the market value of their house because the buyer allows them to carry on living there and cannot sell it until they die or move into care. The older your client is when they start the scheme, the higher the percentage they’ll get.
17. Your client get the right to carry on living in the home under a lease. The terms of the lease will vary depending on which reversion they choose. They usually pay a nominal rent of say £1 each month, or they may have the choice of paying a higher rent in return for more money from the sale.
18. But your client will no longer own their home (even if they only sell part of it). This means they will have to maintain the home while they live in it, so they may need to set aside money to do this. They'll also have to follow the terms of the lease and make regular rent payments. If this could be a problem, then a home reversion may not be suitable for them.
19. The FSA states that home reversions are normally best suited to older people, perhaps over 70 or 75.
20. Your client will have to pay:
• an arrangement fee for setting up the scheme;
• legal fees and valuation fees; and
• buildings insurance.
• there may be extra costs for paying off their loan early.
