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Equity Release

Equity release is a mortgage product that allows you to remain living in your house without paying back the money you have borrowed during your lifetime. Giving you a lump sum or a steady source of income. Sounds wonderful to those with Equity locked away in their homes but are struggling by on their pensions. But is it? What do you know about the down sides and the affect of having this cash sum payment? Does it affect your inheritance? Does it affect your benefits? Can you treat your home as your home?

Equity release is a way of financing a retirement and enjoying your golden years and why not you have earned it. It is now time for your bricks and mortar to work for you. Equity release products are offered by a number of companies and each one comes with a glossy brochure with happy people on the cover enjoying the sunshine. But all equity release schemes have key factors and these are:

  • It is an interest only mortgage
  • It is secured against your main residence
  • You have to be over 55 years of age to have it

It is for the above reasons that if you are thinking of releasing equity from your home you should advise your children and beneficiaries of your estate about what you are doing. The fact that the mortgage is secured against the house means that they will not be able to take the house as their inheritance as they will need to pay off the mortgage. This is likely to result in them needing to sell the Property to repay the Mortgage; and as none of the loan is paid off and interest continues to be added daily, they may not receive anything from the Proceeds of the sale. This would come as a shock and they may feel aggrieved that they were not informed by you that you have released equity in this way. They may also feel that this is not what your intention was and that you were coerced into taking out this Mortgage. By telling them about taking out this equity release and discussing the reasons why you are doing so, you will show them that you fully understand what you are doing and the reason for it. No one likes to think that their elderly loved ones are taken advantage of by a Malicious company seeking to take away their hard earned money and saving, the same can be said about the equity you have built up in your home. Put their minds at rest so they know that you made this decision freely of  your own choice. You might also consider making a will or changing your will to reflect the fact that you have mortgage on the Property and that you will only be able to leave any remaining Equity in the Property and not the Property itself. This will go to show that you gave it consideration and was not forced into getting the loan out.

Did you know that obtaining a release in equity could potentially reduce your benefits? Whilst the release of equity will not affect your state pension it may affect other benefits that you receive especially if they are means tested such as Pension Credit or Council Tax benefits. These are assessed by the amount of capital you have and the capital limit may be varied each year by the Government. But if by taking out this loan you are judged to be over the Lower Capital Limit then you will lose your means tested benefit.  It is for this reason you should seek financial advice from an Independent Financial Adviser and Age Concern or the Citizens Advice Bureaux.

It's your Property so you can do with it what you like. Not any more, not when you have taken equity release on your Property. You will need to contact your lender if you decide to sell or re-mortgage your Property. They may give permission only if there is enough money for the sale or re-mortgage to pay off the Loan. This is not dissimilar to normal Mortgages as you would have to do this if your chose to sell your house subject to a normal mortgage. The difference is with a normal mortgage you pay back some of the capital to build up equity so when selling or re-mortgaging it releases that equity. An Equity release mortgage is not paid during the term of the Loan so the interest keeps on growing and the equity you have at the start of the loan slowly diminishes. So it is possible that you will have no equity at the time of sale or re-mortgage.

If you want someone to live with you, gain the equity lender will be required to give consent. This is the case even if you marry and decide to use the Property as your married home.

The Lender may make spot checks on the Property to ensure that the Property is in good condition as they don’t want any neglect to cause a loss in the value. They will ask you to carryout any work they deem necessary and at your expense. If you chose not to they will pay for someone to do it and the cost of this if you cannot pay it straight away will be added to the loan.

If you want to do an extension to the Property you will require the consent of the Lender as well as the require planning permission and building regulations consent.

You won’t be able to let the Property without the consent of the Lender.

You cannot apply to obtain any home improvement grants unless the lender consents.

If you plan on leaving the Property empty for three months you will need to notify the lender as failure to do so may trigger them to sell the Property.

Is this loss of freedom worth the reward that you have received?

  • If you breach the terms of the of the Mortgage, or are declared bankrupt the property may be repossessed and sold to repay the loan secured on it. This could leave you homeless.
  • If you decide to move house you may need to pay back some of the Loan.
  • You might lose your entitlement to means-tested state benefits.
  • Unless house prices are increasing above the rate of interest the Equity you have in your property will erode with time as it is eaten up by the daily interest on the sum you borrowed.
  • You may not be able to obtain further borrowing against your Property as the lender will not agree to a second loan.
  • You might have to pay an early repayment penalty is you wish to re-mortgage or sell the Property before you die.
  • You will receive the amount of the Loan less deductions notified to you for your own immediate use.
  • You don’t have to make any monthly payments, the loan plus the interest will simply be repaid when sold even if you live in the Property until you die.
  • The amount repayable should never exceed the amount the property is valued at or sold for. Even if there is negative equity the lender will usually clear the debt.

Get the right advice

This is a brief look at Equity release mortgages and as with any financial agreement you should always seek the advice of an independent financial adviser before taking out such a product. They may be able to advise you of other products that are newer to the market and are more suitable to your position. Speak to your family, advise them of what you are doing and why. This can stop there being resentment and argument within the family once you have died. Think of what care you will need, or possibly need in the future; will this affect and mean-tested benefit you will become eligible for? Do you have plans to develop the property in the future or adapt the property in the future to allow you to stay in your home? There is a lot to think about and discuss. You ultimately have to be comfortable with your decision as if you go forward with an equity release it is not so easily and painlessly undone.

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