Unlocking your home’s equity

Releasing equity in your home is a big decision, not one to take lightly

IT IS a quandary that most people find hard to understand: how can you live in a £300,000 property but not have enough money to get by on? It simply doesn’t seem logical. But with house prices rocketing over the past 10 years and the cost of living increasing, it is a situation many face.

Equity release schemes are becoming increasingly popular in potentially offering the over-55s the key to unlocking the value in their homes.

The following guide explains all you need to know about equity release.

What is equity release?
It is a way of unlocking the equity tied up in your property for homeowners aged over 55. There are two types of plan: lifetime mortgages and home reversion plans.

Lifetime mortgage
This is a loan secured against your home, with no regular repayments to make, as the loan and interest are rolled up and usually repaid when you die or if you need to move into long-term care.

Drawdown product
This is a type of lifetime mortgage. The main difference is that you don’t request the full sum of money available to you immediately. Instead, you decide on a maximum amount of equity you want to release and draw down the cash as and when you need it. This also means that interest is paid only on the amount that has actually been used.

Home reversion plan
The plan enables you to sell all or a percentage of your home to a reversion provider through Norwich Union in return for a cash lump sum.

On death, or the sale of the property, the reversion company claims back the percentage of the property price that it owns.

Presently, home reversion plans are not being offered in Scotland.

Safe Home Income Plan
Ship is the UK equity release industry body that represents more than 90% of the equity release sector. All Ship members follow a voluntary code of conduct which includes all plans carrying a ‘no negative equity’ guarantee, which means you will never owe more than the value of your home.

Ship also guarantees the right of tenure for all plan holders and guarantees the right to move home without financial penalty.

Potential pitfalls
Releasing equity in your home is a big decision, and not one to take lightly. There’s only one way you can actually decide whether it’s right for you: by getting all the facts and understanding all the financial and legal obligations.

Make sure you don’t rush into it. Consider what options you have, talk it through with members of your family and make sure you get expert advice from a qualified adviser. For example, equity release might affect the size of an inheritance or your eligibility for means-tested state benefits. What about the inheritance you are able to leave your family?

It is also important to be aware of the dangers. For example, what if the price of your home falls to lower than the amount you have released from your home? This is why it is important to use a provider who offers a ‘no negative equity’ guarantee.

Key considerations
There are a number of things to consider before taking out an equity release plan. Firstly, you must ensure you have considered all of the alternatives, such as moving to a smaller house, to make sure you have reached the right decision.

It is also important that the matter is discussed with your family, especially as their potential inheritance may be affected.

Finally, it is important you choose an adviser who can explain all of the risks involved and give you a clear view on the advantages and disadvantages for your circumstances.

Why use equity release?
People use equity release products in a variety of ways to make their retirement more comfortable, such as simply topping up their income or making home improvements.

Other common uses include taking a special holiday, buying a new car or paying for healthcare.

Is it right for you?
Equity release is not right for everyone so it is important that you understand all the options. Always get financial advice, either independently or through the provider.

And remember that both lifetime mortgages and home reversion plans are intended to last for the rest of your life. With a home reversion plan you can buy back the provider’s share of the property but this will be expensive as you will have to pay the full market value of that share. Paying off a lifetime mortgage early can mean that you incur large charges.

Where can I find out more?
Norwich Union has launched an educational equity release DVD. To request a copy, call 0800 404 6220 or visit www.norwichunion.com/equity-release.

• Anthony Rafferty is head of post retirement for Norwich Union