What Does Equity Release Mean?
“As safe as houses,” like almost any other idiom, owes its special place in our language to its undeniable truth in the world. Since 1977 the price of the average house in the UK has risen from an inflation-adjusted low of £77,198 to the current (Sept 2019) valuation of £230,292. While recent political developments haven’t helped the housing market, even sweeping political changes will be unlikely to trigger a dramatic drop in the property market, certainly not to the levels seen in 1992 and 2007.
But houses are, like any non-currency investment, innately illiquid. There may be hundreds of thousands of pounds tied up in one’s property, but this is where it tends to remain until resale, and homeowners often have non-economic incentives for retaining ownership. Enter the equity release scheme, which allows the owner of a property to draw down a lump-sum, or purchase an annuity to provide a steady income for life. An annuity based on the value of one’s property can be index-linked and assured by the no negative equity guarantee, which protects the borrower in the event of a downturn in the housing market. Released equity, while it must eventually be repaid, can prove even safer in the short term than the value of the property upon which it is based.
Equity Release Plans for Long Term Care or Assisted Living
In the UK, the equity release market is comprised of two types of plan. The most popular of these is a lifetime mortgage, allowing the owner to retain ownership, and the property itself to be liable for repayment of the original loan, which will accrue interest over the course of the owner’s lifetime. Typically, these debts are settled when the owner’s estate is distributed by an executor. The other type of plan is a reversion plan, in which the owner sells all or part of their property to an equity release firm in exchange for both liquid capital and the legal right to continue occupation.
This second sort of equity release is less popular mainly because it essentially entails the selling of a property below the market price in order to retain privileges typically ceded during the sale. The main advantage of this sort of scheme over the first sort is that it – in theory – maximises the lump-sum available without necessitating that the owner incurs substantial debt. This is also the reason for this scheme’s comparative unpopularity, as many seeking equity release do not intend to repay their loan during their lifetime. A reversion plan also distributes assets, rather than transferring liability while retaining ownership.
Benefits of Equity Release
Borrowers of the first sort, however, are not only protected to an extent against market fluctuations, but also retain legal ownership of their property. This can be the perfect strategy for those who are keen to leave something to their family after they’re gone. The value of the estate will of course be diminished by the necessity of repaying the loan, especially if the value of the property does not outgrow the interest rate on the mortgage. However, legal ownership of the property can still pass to next-of-kin, who will also enjoy lower rates of inheritance tax. In this way, all parties can benefit. For those with larger estates who intend to leave a more considerable inheritance, an interest only or newly-approved (2018) Retirement Interest Only Mortgage (both requiring payments only of interest within the lifetime of the borrower) can eliminate the possibility of the estate’s value growth being wiped out by loan interest.
Equity Release for Elderly Care Costs
Equity release (especially on a lifetime mortgage plan) can be a fantastic solution for those who are finding the occupation of their own house increasingly inconvenient and would like to move to more appropriate accommodation without selling outright. The lump sum or annuity can subsequently be used to buy or rent more appropriate accommodation (opening the possibility of renting disused property to provide another source of income), or to move to a purpose-built and carefully-managed environment such as luxury care home, capable of delivering all that is required for a comfortable and enjoyable assisted living stay or long term care, and a lot more besides.
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