What would you like to achieve in 2023?
Maybe you’d like to undertake some major home improvements, help with your own mortgage repayments, or pay off other debts? Perhaps you’d like to help your children or grandchildren by providing a living inheritance in 2023. Equity release is a popular alternative to selling your property or re-mortgaging, for people who wish to free up some tax-free cash and remain in their own home. According to the Equity Release Council, over 200 customers per day chose equity release to manage their finances as £1.6bn of property wealth was withdrawn in Q2 2022. Martina Razaq, B P Collins’ residential property partner, explores the options and risks involved.
What can Equity Release be used for?
Equity release can play a big part during the retirement years, especially when people are living longer. This tax-free disposable income can be used to improve your home and garden, provide a living inheritance to your children and grandchildren; help with your own mortgage repayments, buy a holiday home or pay off other debts.
The most common scheme is an equity release mortgage, which releases a capital sum. Instead of paying monthly interest as with a standard mortgage, interest generally accrues over the mortgage term and is added to the sum owing at the end. Subject to the terms of the equity release mortgage, the individual can usually live at the property as their main residence for as long as their health permits.
Another option is a Home Reversion Plan, which enables you to receive some or all of the value of your home, but only if you continue to live in the property. This type of scheme requires you to sell part, or all of your property, usually, at less than its market value in return for a tax-free lump sum, regular income or both. The company that buys your home will provide a lifetime lease allowing you to live in the property for the remainder of your life without having to pay monthly rent.
Seek legal advice
A good lawyer should always ensure you understand the possible risks associated with either of the above options. For example, B P Collins will make you aware that the equity release may impact on your pension and means tested benefits and review the small print so you’re fully aware of how the equity will be paid off, either upon death or if moving into a care home. You should also ensure you take financial advice when taking out an equity mortgage, so that you are fully informed of the impact on your future financial position.
It is also advisable for your beneficiaries to be informed about how their inheritance may be affected. For example, the interest accrued on £100,000 over ten years, means that there may not be much value left in your home to pass on to your loved ones after this has been repaid.
It is also important to remember, like any mortgage, that the lender will need to consent to any alterations or works carried out to the property and that the lender will have a first legal charge over the property meaning they will be able to sell the property if the terms of the equity mortgage are breached and you may ultimately lose your home.
Different equity release schemes use different financing mechanisms and present different risks. It is therefore important that a solicitor check the details of any agreement before you agree to any form of equity release.
Contact the property team at enquiries@bpcollins.co.uk or call 01753 889995 for further advice and information.
