Money
Retirement
Equity release - Q&A with Saga's expert Alex Edmans
Equity release is a way to access the value built up in your property to help provide you with greater financial freedom. With the recent improvements to equity release plans, the added protection and flexibility that they now provide, more and more homeowners are turning to equity release as a way of funding later life.
If you or a family member are considering a scheme, or would just like to find out exactly what equity release is and how it works then the following could be for you. Saga Business Development Manager Alex Edmans chatted live online to readers on October 16 and answered many of your questions:
Host: Hello and welcome to today's chat. Alex is here and ready to take your questions.
Alex Edmans: Hello. Welcome to the webchat. I hope I can answer as many of your questions as possible.
Crabbleman: In the light of the ongoing credit crunch, isn't it best to sit tight and not mess around with the value of your house?
Alex Edmans: It depends on how soon you feel you may wish to release equity from the property. If you are looking to do so in the near future, then you may wish to consider this sooner rather than later, as if the value of your property falls, you will be able to release less from it. At the moment there are some very competitive equity release rates out there. Some in fact offering better rates than conventional mortgages. Again, policies will be covered by the no negative equity guarantee so that you know you will never owe more than the value of your house.
My main bit of advice to anyone considering equity release is to seek specialist advice as it will not be right for everybody. But for those to whom equity release is suitable, it can make a really positive difference to their retirement.
Linda Andrews: Can you have equity release on property in Cyprus?
Alex Edmans: Unfortunately we are only able to advise on equity release for properties in Great Britain.
Jolly James: Would you please explain a very basic example of how this works please? £200k example. Much appreciated.
Alex Edmans: If say for example, you were 60 and your house is worth £200,000, then you could probably release between £40,000 and £54,000. You could take this as a one-off tax free lump sum or draw it down in smaller portions as is required.
You will be paying interest on any capital released and this will be added to the value of your loan. Next year you would be paying interest on this interest as well and so the debt accrues over time.
The loan will then need to be repaid when the last resident either dies or permanently vacates the property. There are no repayments that have to be made during your lifetime and there are no restrictions on how you use the capital.
Ralph Coates: How would this scheme affect state benefits I might receive? For better or for worse!
Alex Edmans: If you are receiving means-tested benefits then there is a chance that any capital or income that you release will reduce your entitlement to these benefits. Any non means-tested benefits would remain uneffected. It would be important to analyse the benefits of using equity release against the possible loss of benefits.
Svenson: Can you tell us about the types of grant or loans you can get from your local authority when it comes to releasing money for home repairs.
Alex Edmans: There is a disabled facilities grant which would help to renovate the property to adapt the property for someone with disabilities. There are also grants available that can be used to carry out essential maintanance. I would recommend giving your local social services a ring to see what assistance they might be willing to provide.
Mrs French: I'm thinking of taking some money out of the equity in my house, but I am worried that if I do that and house prices keep dropping I wil find myself with no equity left to give to my children? Is there anything else that I could consider doing?
Alex Edmans: It depends on what you would need the money for. The other main options to consider are downsizing, using any existing savings, seeing if anybody in the family would be able to help or seeing if you would be eligible for any state grants.
Carol H: Hello Alex, could I use equity release to buy a house in Spain?
Alex Edmans: Yes!
Alan Kennedy: My relative is a single female aged 68, living in her own home, which she owns outright. The condition of the house is deteriorating and she does not have funds to undertake maintenance and repair. She does not wish to leave what has been her family home for over 40 years. Can she raise a lump sum for repairs and ongoing maintenance through Equity Release? Would there be any pitfalls she should be aware of? Your advice would be greatly appreciated.
Alex Edmans: Yes you can certainly release funds to carry out renovations on your property. The amount that can be raised will depend on the value of the property at outset. I would advise her to check with her local authority to see if she would be eligible for any maintenance grants before she arranged an equity release plan. The main risk is that over time interest will be accruing against the property, and thus the debt will be increasing.
Perry Steveman: What happens at death? I mean in terms of process with equity release - not from a physiological point of view!
Alex Edmans: If the plan is arranged on a single life basis then the plan will need repaying on your death. If the plan is arranged on a joint life basis then it will need repaying on the second death.
Alan Drayton: Hi Alex. Can you please shed light on the revaluation process to release equity from a recently renovated mortgaged property? I have refurbised my property recently and want to get it revalued to release money. Do I get estate agents to value the property? Is it possible to submit multiple valuations?
Alex Edmans: The equity release company will arrange their own valuation of your property to help decide how much they would be willing to loan. If you have an existing mortgage on your property this will need to be repaid from the capital you release.
Karen T: Can you equity release to pay for care?
Alex Edmans: Yes you can. However, most equity release plans need to be repaid when the last resident moves into long term care. Therefore, it is not possible to use equity release to pay for permanent residential or nursing care but you could use it to fund care in your own home. This could help you to remain in your own home for longer. Again, please speak to our care funding team who would be able to help you further.
Alison Fraser: I am single, with no dependents and have already released equity on my home. I am now looking at planning for long term care and wonder what I should do?
Alex Edmans: With regards to planning for long term care then this is a very complex and specialist area. You should speak to an adviser who specialises in this area and they would be able to advise you further. As well as having a team of equity release specialists, at Saga we also have a team of care funding advisers. Please feel free to contact them on 0800 056 6101.
J Fowler: What's the most competitive rate at the moment?
Alex Edmans: At present there are some rates available around 6% a year. This is almost 1% down on the average interest rate a few years ago. So the plans are becoming a lot more economical.
Mr Teal: Can I end up owing more than my home is worth?
Alex Edmans: Not if the plan is provided by a member of SHIP who offer the no negative equity guarantee. The most you will ever owe will be the market value of your property at that time.
Wyn: Can you tell me the tax situation with equity release.
Alex Edmans: The capital you release from your property is released tax free. However, if you then use this capital to produce an income then any income generated would be subject to the normal income tax rules.
Sandra: My local paper has an article about a company that offers a quick cash sale to free up money so you can remain in your house. The downside seems to be that eventually you just end up as a tenant and could be turned out of your house. Do any of the these schemes actually guarantee you to be able to stay in your house as long as you live, or might you run out of money and have to leave?
Alex Edmans: This seems to refer to a sale and rent back plan, rather than a home reversion. These policies are not regulated by the FSA and thus there is a risk that the provider will charge you a market rent or only give you a short term tenancy agreement. With any equity release plans that are registered by the FSA, and covered by SHIP, you have the security of tenure and will never be asked to leave your property.
Paul: Does Saga have access to all plans within the equity release market?
Alex Edmans: Yes. However, we work mainly from a panel of providers, but if their policies would not be suitable for your circumstances we would be able to research the whole of the market to see which, if any, plan would be appropriate.
Brian Matthews: If I take out equity release, can I sell my house? And if so do I have to buy another one?
Alex Edmans: No you don't have to buy another one but the original loan would have to be repaid. As I mentioned earlier, you can transfer the loan but the new property would have to meet the lender's eligibility criteria.
George: Are you allowed to repay the loan at a later date?
Alex Edmans: Equity release plans are designed to be held for the rest of your life. However, you can repay them early if you wish. It is likely, though, that in the early years there would be an early repayment charge to meet. There are some plans that have little or no early repayment charges. If you have a home reversion plan it is possible to buy the share of your property back from the reversion provider but you would have to buy it back at market cost, which would be higher than the amount you originally received.
Robert Green: If I take out equity release and I have to go into a care home (or my wife does) and the other person stays in our house, what would happen?
Alex Edmans: So long as the plan is taken our jointly, then so long as one of you remains in the property the equity release plan continues as before. As mentioned previously, the plan needs to be repaid when the second of you either dies or moves into care.
Helen C: I have inherited a house which needs modernising. Can I release equity from it to make improvements - and then rent it out to pay back the loan? I am still paying a mortgage on my main residence.
Alex Edmans: There are some equity release providers who will release funds against second properties or buy-to-let properties. However, equity release plans are designed to be held for the long term and are not normally paid off until the property is vacated or sold. If you are looking to raise capital against the property and therefore looking to pay off the interest and capital over time then is likely to require a more conventional mortgage.
Doreen H: I am 69 have a house worth approx £180,000 but have no money behind me and am on pension credit. Would you recommend equity release or downsizing. I do not particularly want to leave my current home.
Alex Edmans: Taking equity release could reduce your pension credit. I would suggest speaking to an adviser who could be able to fully review your benefits and see whether equity release would be appropriate or not.
Simon Coward: Can I move house with such a scheme. I am concerned because I may not need such a large house in future years, and what with falling house prices, my new home may well be worth less/cost less than my present home?
Alex Edmans: Yes you can move house, but so long as your new property meets the eligiblity criteria of your lender. If your new home costs less then there may be a chance that some of the loan would be need to be repaid.
Peter: I don't like the idea of releasing large sums of capital, is it possible to do it bite size chunks?
Alex Edmans: Yes, you can now release capital as and when you want it through a drawdown scheme. This will allow you to drawdown in smaller chunks of capital up to a maximum set at outset. You only pay interest on the capital you actually release and so interest accrues more slowly. This is more economical in the long run.
Sarah: I obtained an equity release mortgage with Northern Rock two years ago. How do I stand and would it be better to change. Interest rate is 6.89.
Alex Edmans: There are some equity release plans available at the moment that are paying lower rates of interest. However, as you are only two yeaers into your plan then the chances are that there will be early redemption penalties to pay. I would suggest reading through the paperwork you were given at the time to see what charges may apply. Again, speak to a specialist adviser who will be able to assist you further.
Crabbleman: What is the benefit of equity release ahead of downsizing?
Alex Edmans: The main benefit is that it allows you to remain in your current property and this gives you choice. Downsizing is a good way to release your equity so long as you are happy to move but will also incur the typical moving costs and inconvenience.
C Watkins: Would you recommend taking equity release and then invest proceeeds in the stock market?
Alex Edmans: No because the risk would be that you could be paying a higher interest on your equity release then you would receive in investment returns and this would leave you in a worse position financially.
Sally G: My father has lost an awful lot of money on the stock exchange (not necessarily recently, but over the past five years). He still wants to keep up his investments in the market because that's his hobby. However, he is conscious that he doesn't want to risk mine and my brother's inheritance. Can he 'do' an equity release and give us the money as early inheritance?
Alex Edmans: Yes, it would be possible, although it is usually best to use existing savings before releasing equity from a property. Certainly you can release equity from a property to give to inheritance now but as I mentioned previously, I would recommend getting advice first. It is important to bear in mind that equity release is likely to reduce the total amount of inheritance in the future.
L Turney: Would you consider equity release as a last resort option?
Alex Edmans: Hi - I hope my response to the previous question also answers your query.
Paula Duffy: I have been reading about the Which report that says that equity release is something that people should only do as a last resort, and that people should move to a smaller house or flat instaed. What do you think?
Alex Edmans: I disagree with the idea that equity release should only be used as a last resort. Not everyone will want to leave their homes and equity release allows you the chance to remain in your home and release the funds you require. However, it will not be right for everyone and before you agree to any plan I would strongly recommend you seek specialist independent advice to fully review your options. Please contact us if you would like to speak to one of our advisers to review your own circumstances.
Jason VB: Hi Alex, looking forward to the chat. my question is how safe are equity release schemes given the current house price climate?
Alex Edmans: So long as the plan is offered by a member of Safe Home Income Plans (SHIP), then it will have a number of guarantees to protect you. Probably the two most important in the current climate are firstly the no negative equity guarantee that guarantees that even if you house value falls below the level of debt, then you will still never owe more than the value of your property. The second is a security of tenure which gives you the right to remain in your property for the rest of your life.
Peter Simpson: How much for a £350,000 house?
Alex Edmans: How much you can release depends on your age. For example, at 65 you are likely to be able to release between 27-32% of the value of the property. The amount you can release increases with age. Please contact one of our advisers if you would like to get a definite quotation for yourself.
J.Smith: If we took out a scheme, what happens to our house once myself and my husband have passed away? Am thinking of my childrens' inheritance etc
Alex Edmans: When the second of you either dies or permanently vacates the property, then the equity release plan plus interest will have to be paid to the equity release provider. This will obviously reduce the inheritance that your children are likely to receive, however it does not mean that all of the property value is lost as you will still own the property and any remaining equity will still pass to your beneficiaries. It is also possible to arrange plans with a certain level of inheritance protection included. If you have a home revision plan then any percentage of the property that you have not sold to your provider will fall into your estate.
Joshua Silverstein: A fool and his money are easily parted. What exactly is equity release? No flim flam please.
Alex Edmans: Equity release is simply releasing some of the capital that has built in your property over the years. There are two different ways to release this equity. The most common is through a lifetime mortgage, whereby you release the lump sum by way of a mortgage against your property. There are no monthly repayments to be paid and the interest accrues against the property. On your death, or on moving into long-term care, the loan and the accrued interest will have to be repaid.
The second option is a home reversion plan whereby you sell all, or a portion of your property to the home reversion provider. There is no interest to be paid, however it is likely that the provider will buy the proportion of the property off you at less than market rate. You will retain the right you live in the property for the rest of your life. We have a free guide to equity release which you can download from our website which will explain each plan in more detail.
Alex Edmans: Thank you for your time. I'm sorry I haven't been able to answer everyone's quesitons. If you still have questions remaining please feel free to email me on alex.edmans@saga.co.uk or to contact our Equity Release Advice Service on 0800 015 6256.
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