How to Raise Tax-Free Cash from Your Home
Equity Release Plans to Get Money from Your House
Feb 1, 2009
The value of one’s home minus any outstanding mortgage, is described as one’s ‘equity’. Equity Release Plans allow people of retirement age, or those approaching it, to release some of this equity and turn it into cash, either as a lump sum or as regular income. There are no repayments to make, and with most forms of equity release the person continues to own his or her own home for the rest of his life.
Who Can Benefit from Equity Release Plans?
In general an individual or couple are eligible for one of these schemes if they own their own home and the youngest homeowner is 55 or over. It is also a condition when releasing equity that the person uses some of the proceeds to clear any outstanding mortgage that they have on the property.
The amount of money that can be raised is subject to the person’s age and the value of the property. In general, an individual can release a larger proportion of the home’s value the older they get.
How Do Equity Release Schemes Work?
There are three main types of equity release plans:
- A Lifetime Mortgage allows the individual or couple to release a lump sum of cash or regular additional income from the value of the property. The amount that is released, plus any interest accrued, is paid from the proceeds of the property once it is sold. This is usually when the person dies or goes into long-term care.
- A Drawdown Lifetime Mortgage is similar to the Lifetime Mortgage, but the person can access their money more flexibly. There is the option to release cash over time as and when it is needed. Since interest is only paid on the cash that is taken, this may be more cost-effective.
- A Home Reversion Plan – also known as a Lifetime Lease - allows the person to exchange the ownership of some or all of the property for a lump sum of cash. The individual then has the right to remain on the property free of charge for the rest of their life. Generally the individual receives less for the property than its market value.
Are Equity Release Plans Safe?
In the past these plans had a bad reputation. There were horror stories going around of people losing their homes with nothing to show for it. However, the market is now controlled, with all reputable Equity Release Schemes in the UK being regulated by the Financial Services Authority. All of them except the Home Reversion Plan allow the person to retain 100% ownership of their home, and to benefit from any increase in its value, so there is little risk involved.
Equity Release Plans can therefore be very useful ways to improve the standard of living of many older people. But they are not for everyone. As with most things, there are advantages and disadvantages, depending on one’s circumstances, needs, and desires. Therefore this type of plan should be looked into carefully before proceeding.
Source
A Guide to Releasing Tax-Free Cash From Your Home, Age Partnership.
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