In principle, there are two types of equity release – home-reversion schemes and lifetime mortgages. Home-reversion schemes are when you sell all or part of your home either for a lump sum or an income. Lifetime mortgages are when you mortgage all or part of your property either for a lump sum or an income. In practice, home-reversion schemes are now very niche and lifetime mortgages dominate the market.
Lifetime mortgages are similar to regular mortgages in that you continue to have the rights and responsibilities of a homeowner. The difference is that you do not necessarily have to make repayments during your lifetime. Instead, your home is sold when you die or move into permanent care.
As interest continues to be added for as long as the loan is outstanding, this can mean that the equity in your home is vastly reduced. In fact, you may even go into negative equity. If, however, you choose a product with a no-negative-equity guarantee, that should not have any impact on your heirs. For some people, it may be a useful way to reduce their Inheritance Tax liability.
That said, there are now variations on lifetime mortgages which offer more flexibility to borrowers. For example, some allow you to make interest repayments during your lifetime when you are able so as to reduce the cost to your estate when you die (or move into permanent care).
You usually have to be over 55 to take out equity release. Obviously, your life expectancy will be taken into account when the lender makes you an offer. Bluntly, the older you are, the better the deal you are likely to get. You may, however, get an even better deal by monetising your current property in some other way, for example, by taking advantage of the government’s rent-a-room scheme. You might also want to think about downsizing.
Remember that the funds received from equity release may impact your entitlement to any means-tested benefits.
You will need to take legal advice before releasing equity from your home as Lifetime
Mortgages and Home Reversion plans are not right for everyone. This is a referral service.
The Lifetime ISA and the Help to Buy: Equity Loan scheme
The Lifetime ISA and the Help to Buy: Equity Loan scheme are the two main ways the government tries to help first-time buyers get on the housing ladder.
The Lifetime ISA can be used to save either for the deposit on your first home or for your retirement. You can open one if you’re between the ages of 18 and 40 and save up to £4000 per year until you reach the age of 51. You get a 25% bonus on your savings, up to a maximum of £1000 per year. This means that technically, you could get an extra £33,000 toward your first home, although you would need to wait until you were 51 to buy it!
The Help to Buy: Equity Loan scheme exists in various forms in different parts of the UK. In England, the rules are being changed so that the scheme is targeted to first-time buyers only. This starts in April 2021 and the scheme is due to run until March 2023.
First-time buyers will still need a 5% deposit and will still receive a government-backed guarantee for 20% of the cost of their home (40% in Greater London). There will, however, be regional price-caps as opposed to the current system of one price cap for the whole of England.
Per the existing arrangement, the loan is interest-free for five years, after this buyers can either start paying interest or buy the government out of their share in the property, for example by remortgaging.
Remember that this is an equity loan, which means that you pay back the value of the government’s share in your property at the time you sell it, rather than the amount you originally borrowed.
For more information, please contact us