Equity Release Planning
Grow, protect and enjoy your wealth
Our purpose at Redwood Financial is help our Clients to grow, protect and enjoy their wealth through our extensive portfolio of wealth planning products and expertise, including Equity Release.
Unfortunately, with inflation, rising care costs and living longer, many people find themselves falling short of capital, income or both in their retirement years. For homeowners over the age of 55 you can access a facility to release money from your home called Equity Release. This property must be your main residence to qualify and the scheme enables you to supplement your income without necessarily having to make any monthly repayments.
Types of Equity Release
There are two main types of equity release: Lifetime Mortgages and Home Reversion Plans. Both types are regulated by the Financial Conduct Authority (FCA). By using an equity release product, a homeowner can draw a lump sum and/or regular smaller sums from the value of their home, while continuing to remain living in it.
There is plenty of flexibility with Equity Release to use the funds for a variety of purposes, including:
- Adapting / improving your home to enable you to remain living in it independently for longer
- Paying off debts, such as outstanding mortgages or credit cards
- Paying for help around the home, including domiciliary social care
- Purchasing a new car or other ‘large ticket’ items
- Providing financial assistance to your children and grandchildren – perhaps with a deposit on a house or to help them through university
- Taking a holiday of a lifetime, perhaps to visit family living overseas
What is a Lifetime Mortgage?
Lifetime Mortgages enable you to choose to extract your funds in a single lump sum and/or in smaller amounts over time up to the maximum limit agreed with the plan provider. Like a traditional mortgage you will retain full ownership of your home and you can choose to either pay interest on the loan, or defer any payments until after your death, effectively rolling them up to be settled from your Estate value.
The Lifetime Mortgage loan and any interest must also be repaid if you have to move into long term care or permanent care.
If you are part of a couple, the repayment is not made until the last person living in the home either dies or moves to long term care. In other words, both you and your partner are free to live in your home for the rest of your lives. You can also elect to retain some of the value of your property as an inheritance for your family, meaning that you can benefit from releasing equity while ensuring you have something to pass on to your children.
With some plans you can make monthly interest repayments in part, or in full. That way, you can keep the debt to the initial capital before interest. If you choose to make interest repayments, you still have the option to move to a roll up arrangement at a later date if you wish. We would always recommend that you discuss any details with your Equity Plan provider before making any payments.
How much value can I release from my property with a Lifetime Mortgage Equity Release Plan?
The amount that can be released with a Lifetime Mortgage Equity Release Plan is dependent on your age and the market value of your home. Some providers may offer larger sums to those with certain past or present medical conditions, but generally you can normally expect to release anywhere between 30% – 60% of your property value.
What is a Home Reversion Plan?
Another way to access all or part of the value of your property while retaining the right to remain in it, rent free is through a Home Reversion plan.
The basic principle of a Home Reversion plan is that the Equity Release provider will purchase all or a part percentage of your house. You will know precisely what portion of your property you have sold and, equally, what has been ring-fenced for later use, possibly to leave in a Will.
The percentage you retain will always remain the same regardless of the change in property values, unless you decide to take further cash releases. At the end of the plan your property is sold, and the sale proceeds are shared according to the remaining proportions of ownership.
Again, depending on your age and medical conditions, additional Equity Release sums may be possible with your Home Reversion Plan. You will be provided with a tax-free cash lump sum (or regular payments) and a lifetime lease, guaranteeing you the right to stay in your property rent-free for the rest of your life.
There is no day to day interference and no restrictions in treating the house exactly as before as a private home to live in freely.
Will Equity Release help me with an Inheritance Tax problem?
Equity Release schemes can in some cases enable you as a homeowner to reduce the value of the property on your Estate for Inheritance Tax mitigation purposes, while you are still benefiting from the full value of the property by continuing to live in it.
You may have already put Estate Planning into place that has included putting your home into a Trust and there could potentially be a significant issue if you have already undertaken some Tax or Estate Planning using Trusts, before considering an Equity Release.
Trusts are common and can be vital to secure the well-being of surviving partners, reduce their tax exposure, or ensure that people can direct their wealth where they want when they die.
A common example especially in 2nd marriages, is where each partner leaves in the first instance their share of their home in a ‘Life Interest Trust’ to their current partner. This way, the surviving partner can live in the property until they die or move, and the ultimate beneficiaries of this each share of the property will be their own children.
This appears to be very straightforward and sensible, but problems occur when trying to combine Equity Release with the Estate & Tax Planning solutions.
Unless any Trust created has been expertly crafted to take in account the Equity Release product in the right way, any outstanding loan repayment may only come from the share of the last surviving partner – causing extreme family friction after death due to the financial imbalance created between the families.
So whilst Equity Release can form part of your wider Estate & Inheritance Tax Planning, we always recommend you consider the need for Equity Release first, before moving onto your Estate and Inheritance Tax Planning, so these two areas can work together more harmoniously.