EQUITY RELEASE PRODUCTS – RISK WARNING
Equity release schemes can be very helpful but are not suitable for everyone. It is important to understand the risks and to understand the cost, the level of flexibility (if you might want to move home) and the possible impact on future state benefits.
Things to consider include:
- whether the scheme has negative equity guarantee, so that if the value of your property decreases any outstanding debt after sale of your property won’t be passed on to your next of kin
- whether the lender will allow you to move home should you want to
- on-going responsibility for maintaining the property and the associated costs
- the terms and conditions of leases for home reversion and under what conditions you could lose your home
As well as the risks associated with Equity Release you may also need to consider risks based upon how you use the released funds e.g. if you are using the released funds to reduce potential Inheritance Tax and you don’t survive for seven years.
In later life people often find that they have become ‘asset rich, cash poor’ as their income dwindles but the value of their residence is significant.
Equity release is the term used to describe the ways you can release some or all of this property equity to either provide a regular income and/or a lump sum.
There are two main types of equity release scheme. They are known as lifetime mortgages and home reversion schemes. With lifetime mortgages, the mortgage is repaid from the proceeds when you die or, for example, on moving into a nursing home. In many ways they are similar to a normal residential mortgage although repayments during the term tend to be small or can even be zero.
With home reversion there is no mortgage. You sell all, or a percentage of your home, to a third party and the lender will receive the relevant percentage value of the property when it is sold. Typically schemes are often in joint names so that it continues until the second death.
If you release cash from your property you might give it to beneficiaries now, perhaps to mitigate Inheritance Tax. You might wish to spend it on yourself. Alternatively, it may be purchase an annuity to provide a regular income for life. It is your choice what you do with the proceeds of an equity release arrangement.