A brief history of equity release

The Equity Release market in the UK started in 1965 with the launch of the first modern home reversion plan. A number of other providers were active in the market through the 1960s, 70s and 80s with “mortgage and annuity” schemes, or “Home Income Plans” available from 1972. There is a general awareness that there have been issues with “early” equity release schemes, but it is important to note that these earliest schemes were not the culprits – indeed, throughout this period there have been no issues with sound products securely distributed

SHIP was launched in 1991 to promote safe plans and to safeguard the interests of customers via a code of conduct for the industry. Its aim is to ensure that a repeat of the scandals of the late 1980s never occur again.

In 2004, lifetime mortgages became a regulated product under the Financial Services Authority (FSA). Home reversions became regulated in 2007.

More than £1bn in equity release loans was taken out by customers in 2008 and this figure is expected to grow significantly over the next few years.

Understanding

With the rising prices of everyday life, more and more people are finding that their pension savings together with the state pension are not providing sufficient income to meet all their needs in retirement. You may have sufficient savings and assets you can draw on but If not, your home could be a good way to help boost your pension.

The UK housing market may have slowed in 2008, but this follows almost a decade of unprecedented growth in property prices. As a result, Britons own significant amounts of equity in their homes.

Your home can be used in a number of ways to generate extra income:

How it works

There are two main types of equity release plans: lifetime mortgages and home reversion plans.

1. Lifetime mortgages allow you to take out a loan on your property in return for a tax-free lump sum, an income or a combination of the two. Much like a standard mortgage, the loan is secured against your property and you continue to own your own home.

The amount you can release depends on a combination of your age, health and the value of your property.

There are several ways a lifetime mortgage can work:

Roll-up – where the interest is not paid back on a monthly basis to the lender but rolls up over time. The loan and the rolled-up interest are repaid either when your home is sold, on your death, or if you move into long-term care. There are no repayments to make during the life of the loan and both members of a couple are covered, so if one goes into long term care before the other, the other party can remain in the house until they either die or move into long term care themselves.

You generally have the choice of receiving either a cash lump sum or money in smaller amounts as and when you want this is called a Flexible Drawdown. Your choice of product will determine how quickly the interest grows on the loan. Taking a Drawdown product may reduce the total interest cost over time and prove more cost effective than taking out a large lump sum at the start.

Interest-only – where you pay monthly interest on the loan and the loan sum is repaid when the house is sold, on your death or if you move into long-term care. In some cases it is possible to pay monthly interest only on a loan and then roll this up when it is no longer affordable to make monthly payments.

2. Home reversions involve you selling all or part of your home to a company in return for a lump sum or regular income and the right to remain living there.

When you die or move into long-term care, the provider will be entitled to its share of the property’s value at the prevailing market rate. The balance of the property that you didn’t sell goes to your estate.

The amount you can raise from a home reversion scheme depends on your age and the age of your partner but it tends to be between 35% and 60% of the market value of the property.

Not currently regulated, sale and rentback schemes are another way of generating equity from your property. Sale and Rent back or Sale and Leaseback as it is sometimes known, entails you selling your home, usually at a significantly reduced value, and then renting this same home back which means you become the tenant. You would normally have an assured short hold tenancy agreement, which may be for 6 or 12 months. Customers who use these schemes are usually looking for a quick sale and often receive much less for their property than the market value. Usually, customers sign an assured shorthold tenancy agreement that enables them to live in the property in return for a monthly rent, which may be increased in the future.

The provision of sale and rentback or leaseback schemes are not regulated by the Financial Services Authority and do not fall under SHIP. These schemes can be sold by anyone without the need for specific qualifications so you cannot be certain that you are receiving the best advice available. There is also no security should the company go into receivership meaning you could end up being evicted from your home. Whilst on the face of it these schemes may look attractive it is important to fully understand the risks. Please see our list of do’s and don’ts if you are considering a sale and rentback scheme.

Sale and Rentback schemes are very different to regulated equity releaes offered by SHIP members, namely because you have no security of tenure and can be evicted from your home, even after selling at a reduced rate.

It is also possible to sell your property and rent it back on a lifetime lease. This option will give you more security of tenure, but you must be able to keep up your monthly rental payments. Lifetime leases are regulated by the FSA but do not come under SHIP.

To understand the features and risks of equity release plan ask for a personalised illustration from your adviser. Taking out a lifetime mortgage could affect your tax position, your eligibility for means-tested benefits and ability to move or sell your property. An equity release plan will reduce any inheritance that you decide to leave. You should talk to your financial adviser about these risks if you are at all unsure.

What to do next

After having done your research if you decide that equity release is right for you then these are the first steps you should take:

Make sure you’re eligible for equity release. You need to be a homeowner and the youngest applicant needs to be aged at least 55 to qualify. The age criteria for home reversions schemes may be a little higher than this so it’s worth checking.

Find out the value of your home. This will help you find out how much you may be able to release. You can do this in a number of ways:

By getting an estate agent to do an appraisal of the approximate value of your property.

By talking to friends / neighbours who have recently moved in to your street / area

By looking in the local property pages at similar properties in your area

Please note that this will only give you an approximate value and is not the same as a report and valuation from a qualified surveyor.

Check how the money released may affect any state benefits you receive or your tax position. Any equity you take from your home is tax-free, however if you should invest this, which is not generally needed nowadays, any interest you receive may be taxable and may affect your tax position. A financial adviser can help you with this.

If possible talk frankly to your family as it will affect their inheritance, but do consider any undue influence from family. The decision to release equity must by yours.

Consider how releasing the money would affect your options for moving home or selling in the future for instance if you want to downsize in the future you can do this but you may have to pay a proportion of the equity you have released back to the provider, this could come from the proceeds of your sale.

Decide on the type of adviser you want to deal with. All SHIP members products are regulated which means there are strict controls via the FSA on the advice you receive. There are three broad types of advisers (they will explain this in their first meeting with you):

Providers who have their own advisers that can only advise on their own products

Advisers (tied agents) who only advise on a few products

Advisers (independent financial advisers) who can provide advice on the different products across the whole market