Monday, 13 July 2009

what is equity release and how can it help you ?

posted by debts.org at 04:58

Equity release is a way of using your property to release extra cash, and is becoming increasingly popular with older homeowners. You can release cash from your home to help with living expenses, for buying a new car or for home improvements. By releasing equity from your home, you can have a more comfortable living without having to move house or downsize, benefitting from the increased value your house has built up over the years.

Types of equity release

Two types of equity release include lifetime mortgages and home reversion schemes, which are only available to older homeowners. Some schemes have a minimum age limit of 50 and some are only available to homeowners age 70 and over. Lifetime loans are a type of home loan on up to 50% of your property´s value, so you must pay interest on how much you borrow. The younger you are the higher the interest rates.

However, the repayments can be rolled up, which means they are paid in full when the property is sold or when the borrower dies or goes into long-term care. Reversion schemes for homeowners above the age of 65, involve selling all or part of your home to an equity release company, and living in the property rent-free until you die. After your death, the equity company will sell the property, and gain from any growth it has realised since the arrangement was first made. Your home must be in a good condition for you to be accepted by an equity release company.

Equity release is not the only option

There are disadvantages to equity release schemes, and your state benefit could be affected if you have the means to pay for dentist and optician fees, for example. The interest rate on lifetime mortgages is normally higher than on standard home loans, so that could be a better option. You could also use existing savings or move to a smaller home. If you think you are getting into debt, or you simply want to find the best way to release some cash, you should contact a specialist debt company who can advise you about other options. Debt problems are unfortunately common in the UK today, and there are many different ways to get yourself on a more sound financial footing.

Don´t be afraid to take advice about equity release or debt management

Releasing equity means that eventually your children will lose some of any inheritance you may want to leave them, and you should discuss equity release with them before making any decisions. A specialist adviser will also be able to help and advise you about equity release, and the Financial Services Authority recommends speaking to an expert before agreeing to any deal.
A lump sum or a draw down with a lifetime mortgage?

If you are planning to take out a lifetime mortgage, you can choose between accepting a lump sum, where the money comes to you in one go, or to draw the cash in monthly instalments. Income drawdown is not the best option if you are very old or if you are suffering from ill health, as you will lose out if anything happens to you.

Avoid risks with equity release

Equity release plans are now regulated by the Financial Services Authority, which means you could have access to funds from the Financial Services Compensation Scheme if things go wrong. Safe Home Income Plans (SHIP), is a self-regulatory body especially set up for the equity release industry, and has a list of members. SHIP members offers borrowers guarantees about living in their homes for life and allows them to move into a new property without penalty. SHIP also ensures there will be no negative equity attached to the property, so that homeowners never owe more than the value of their home.

How does equity release affect inheritance tax?

Equity release is often used to reduce the value of your estate after death. This means your children will not have to pay as much inheritance tax, which is currently 40% of your assets above £300,000. Once equity has been released, it can still be passed on to your children in the form of gifts to avoid inheritance tax in the future.

Some homeowners see equity release as a way of getting out of debt. Explore all the options before entering into an equity release deal. You should seek the help and advice of an expert, or speak to a professional debt counsellor at a debt specialist company such as debts.org who can arrange for you to look at different options to help your financial position

Labels: financial services authority, inheritance tax