Are equity release schemes a good idea?

 

Equity release schemes can provide a great financial option for retirees who no longer have an income but who have valuable homes. An equity release scheme involves borrowing money against the equity you own in your home. The money is released to you now, and the debt is repaid from the sale proceeds once your home is sold, which is usually after your death.

What is an equity release scheme?

There are two main types of equity release scheme:

  • Lifetime mortgages – Under a lifetime mortgage, the lender pays you a lump sum or monthly income, and the interest is ‘rolled up’ into the loan so that you do not have to pay anything and the amount borrowed plus the interest is eventually repaid out of the sale proceeds
  • Home reversion schemes – Under a home reversion scheme, you sell your home or a share of it in return for a lump sum or a monthly income. You technically become a tenant in your home, but with the right to continue living there for the rest of your life, either rent free or at a nominal rent. On the sale of the property, usually when you die, the company gets their proportion paid out

Whilst this is understandably an attractive option for many retirees, it is not suitable for everyone and therefore it is essential to get legal advice from a specialist property solicitor before entering into a scheme.

Could I lose my home?

A person’s home is generally their most valuable possession, so it is important to protect it. Signing up to dubious equity release schemes can jeopardise all that you have built up and secured in your home. Before considering an equity release scheme, get a property solicitor to review the documents and advise you on the scheme.

Under a lifetime mortgage, you could possibly lose your home if the sale of the home is not enough to cover the interest charged across the lifetime of the scheme. Or, if payments of interest are required, you may lose your home if you cannot meet the repayments.

Under a home reversion scheme, you could lose your home if you are obligated to pay rent and you cannot meet your rent payments. Or, you could lose your home if you break the lease.

What are the other risks?

Some of the major risks that can apply to certain types of equity release schemes include the following:

  • You may lose all rights to your property and not be able to bequeath it to your family when you die
  • You may lose flexibility in changing your financial setup later in time
  • When your home is eventually sold, you will likely receive far below the market value for your property
  • You could end up owing more money than the value of your home
  • You may have insecure rights as a tenant in your own home
  • If you default on any repayments under your scheme you may be evicted from your own home
  • You may be penalised if you later choose to move to live somewhere other than your home

Equity release schemes can also affect your entitlement to benefits and your tax liability. This is why it is good practice to get legal advice from a property solicitor before entering into a scheme.

If you are considering an equity release scheme, Caven can put you in touch with property law specialist solicitors in your area who can advise on the pros and cons of entering into an equity release scheme. Please call us on 08001 221 2299 or complete the web-form above.

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