There are many people who spend all of their lives in employment, contributing to a works pension, but, once they reach 55 and over, they can feel that their accumulated retirement allowance will not be sufficient to maintain their lifestyle.
Luckily, for those who own their own property, with no outstanding mortgages, there is the option of an equity release plan. This allows the borrower to in effect withdraw equity from their property in cash form, which will help support their retirement.
As with mainstream mortgages, equity release plans are regulated by the Financial Conduct Authority (FCA), meaning that there are set processes and procedures that the lender must adhere to in order to remain compliant, such as correctly assessing their customers’ needs before recommending a solution.
In order to be eligible for an equity release plan, applicants must be between 55-95 years of age and be a UK homeowner. The equity released can be spent in whichever way the applicant sees fit, and in most circumstances there are no monthly repayments to be maintained. This means that clients will often be able to continue living in the property for the rest of their life.
Different types of plan
Whilst there are a number of companies that offer equity release arrangements, there are two main types of plans.
The first is a lifetime mortgage, which generates a tax-free sum that can be spent on anything. The interest payable ‘rolls up’ and accrues until the property is sold or the homeowner dies, with the original amount released plus accrued interest becoming repayable.
Secondly, there are reversion plans. In this instance, the homeowner sells part of or even their entire home in return for a tax-free lump sum. Again, there are no monthly repayments required. Upon death, the property would be sold and the lender repaid their percentage amount.
If the funds are required to maintain a monthly income, as opposed to a lump-sum purchase, some plans provide a drawdown facility. This allows borrowers to take out money at intervals, meaning that they only request what they need, with interest only accruing on the amount that has been released.
Points to consider
As well as working within the guidelines and regulations of the FCA, providers are also required to be registered with the Equity Release Council, which works to maintain the financial safety of homeowners seeking these types of plans.
There are already many people who have utilised such plans and released the equity in their home. Taking the step enabled them to boost their cash flow, fund a certain purchase, and ultimately maintain their standard of living.
Part of the mortgage adviser’s role is to ensure that the customer fully understands the process and its implications. They need to be clear on the fact that taking out one of these plans could decrease the total value of the estate in the event of death, and could also impact on any claimed benefits.