Turning bricks and mortar into money in bank

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Equity release is the term for taking tax-free cash out of your home whilst still continuing to live in it. So often, bricks and mortar are your greatest asset and yet only a minority access such funding.

An extra lump sum later in life, perhaps well into retirement years, can make a real difference to maintaining and perhaps improving one’s lifestyle. The ‘equity’ is the value of the property less any mortgage.

If purchased many years ago, your home may have appreciated markedly. The average house price now stands at £164,134. Property prices have doubled roughly every eight years since 1950 – a rate that vastly outweighs the increase in income and living costs over the same period.

It may be that you wish to keep the entire sum for your heirs but some of its enhanced value could be taken now. Currently, people over 65 own more than £749bn of property without mortgages, according to Key Retirement Solutions Pensioner Property Equity Index.

All equity release planners have been fully regulated by the Financial Services Authority since April 2007. The range offered is flexible, more affordable and more secure than ever before.

When looking for a potential equity release provider, always opt for one in membership of the trade body Safe Home Income Plans or SHIP as this guarantees you can never pass on debt or ‘negative equity’ to your estate.

A non-SHIP lender may offer a variable interest loan which is risky if the rate increases sharply. This could erode all the equity in the property.

SHIP says advances in the first quarter rose 10 per cent on the first three months of last year to £199.1m. With ‘baby boomers’ now reaching retirement and trying to pay off mortgages with poorly performing endowments. Dan Baines of Leeds-based Age Partnership thinks there will be a jump in equity release in the next few years.

The lump sum can be used for any purpose from home improvements or repairs. Others may wish to fund a grandchild’s wedding or a world cruise.

To be eligible you must own the property and the youngest homeowner must be 55 or older.

In the event there is some residual loan on the property, it must be fully repaid as a condition of receiving the lump sum.

The amount that can be raised depends on both your age and the property’s value. The percentage of value that can be released rises with age.

Four schemes are available:

Lifetime mortgage where the amount released plus interest is repaid from the money made when the property is sold, usually on leaving the home or death;

Drawdown lifetime mortgage is more flexible, giving the option to release cash over time when required. Interest is only paid on the cash taken and so is more cost-effective;

Interest-only lifetime mortgage where you make regular repayments and the balance repaid when you have vacated the property or died;

Home reversion plan or lifetime lease where you exchange ownership of some or all of the property for cash but it is lower than the market value as you continue to live in it rent-free.

Drawdown is currently the most popular, accounting for 66 per cent of sales in the first quarter compared with 55 per cent for the whole of last year. Typically, 21 per cent opt for a lifetime mortgage, 12 per cent for interest-only lifetime and just one per cent for home reversion.

Bridgewater Equity Release still offers the latter for those aged 65 and older.

Before taking any of these options, it’s vital to discuss such plans with your family and consider whether moving to a cheaper property might be more appropriate. Some prefer to take in a lodger and benefit from the Government’s rent-a-room scheme which allows up to £4,250 to be received annually tax-free for furnished accommodation.

Your entitlement to means-tested state help – such as council tax benefit or pension credit – may be adversely affected.

All lifetime mortgage and drawdown lifetime mortgages are portable, allowing you to move home and take the plan with you. However, early repayment fees may apply.

Plans are available from high street names like Aviva and LV= (Liverpool Victoria) as well as specialists. Independent brokers can not only compare offers but also access preferential plans which are not available publicly.

Those with interest-only mortgages and inadequate endowment policies are looking to equity release. As a guide to the amount that can be released, the maximum loan to value (LTV) would be 19 per cent of a property value at age 55, 24 per cent at 60, 29 per cent at 65 and 34 per cent at 70.

Slightly higher rates could apply for those with certain health problems or through a home reversion plan and for those with lifetime mortgages.

It’s vital to do the arithmetic as the loan debt will typically double every 12 years. According to Key Retirement Solutions, a £50,000 equity release mortgage at 6.5 per cent would reach £93,857 after a decade and £176,182 after 20 years.

On the plus side, equity release provides an excellent way to cut inheritance tax. By taking out some of their home value, an individual can give away a significant amount to their children and grandchildren with no IHT to pay, provided they survive seven years. On death, their estate will be reduced by the mortgage debt.

Remember to consider additional costs, such as a valuation charge and fees for financial advice and a solicitor. Applicants may have to also pay the legal fees for the provider, as with Holmesdale and Vernon. There may also be a discharge fee (as with LV=) and a further cost if the loan is increased.

Most plans impose an early repayment charge. This can be up to 25 per cent of the original loan (Aviva and Stonehaven) but may be far lower, such as five per cent in the first five years (LV= and Newlife). One lender (More2Life) bases the charge on the movement of gilts, taking the FTSE UK 15-year gilt index.

Rates are far higher than for mortgages. Comparing fixed rates, whilst there are home loans of 2.64 per cent (HSBC to July 2014) and 2.95 per cent (Leeds Building Society to June 2015), equity release rates for life can be 7.53 per cent (Aviva), 7.65 per cent (Partnership Assurance) and 7.29 per cent (Newlife).

Research by Moneyfacts shows that the lowest equity release rates are 5.89 per cent for fixed (Stonehaven) and 4.89 per cent for variable (Holmesdale Building Society, a non-SHIP member).