Secured Loans & Mortgages
With the whole pension fiasco many people are struggling when in their golden years. Releasing the equity from your home can be a good way to supplement your income in retirement. Make sure you use these ten points to avoid the pitfalls.
#1 Make Sure That Equity Release Is Right For You
If you are coming near to retirement or are retired and you are a homeowner you could be eligible for a cash lump sum in the form of an equity release plan. The amount you eligible for will depend on your age, property and the type of scheme.
Regardless of the equity release plan you choose, it will still affect the amount you are able to leave as inheritance. So you should make sure that you talk things through carefully with your family first.
#2 Get Financial Advice
It is always a good idea to talk to an independent financial advisor who will be able to access your current situation and what you want to achieve and find the most suitable solution.
Make sure you ask your financial advisor about the different equity release options available, the associated costs and whether any repayment charges are payable if you decide to end your plan early.
#3 Make Sure Your Provider Is A Member Of SHIP
Safe Home Income Plans (SHIP) is the organisation dedicated to the protection of equity release plan holders and the promotion of safe home income and equity release plans. All participating companies have pledged to observe the SHIP code of practice, which guarantees the safety of all their plans.
#4 Check Out A Lifetime Mortgage
Lifetime mortgages used to be called cash release plans or roll up mortgages. The amount you borrow is secured as a mortgage against your home and you do not have to pay anything back until you die, need to go into care or the loan is repaid from the sale of your home.
Interest builds up from the start of the loan until it is repaid. A no negative equity guarantee ensures the lender will always accept the value of your home as full repayment for the loan and your estate will not have anything to pay on top. This is something to talk to your financial advisor about.
#5 Consider A Home Income Scheme
A home income scheme is another type of product where the money from a lifetime mortgage is used to buy an insurance policy that provides a guaranteed income for the rest of your life.
#6 Look At A Reversion Scheme
This is where you sell all or part of the value of your home to a reversion company in return for either a cash lump sum or an income. The amount you receive will be less than the value of the proportion you have sold. You can live in your home for the rrest of your life, but you will not be the sole owner and in some cases may have to pay rent. When you die the property is sold and reversion company keeps its share of proceeds.
#7 Check Whether The Product You Have Chosen Is Regulated
The Financial Services Authority (FSA) currently regulate lifetime mortgages. If you see a product advertised as a lifetime mortgage, find out exactly what type of product it is. Regulation means advisors and lenders have to adhere to the FSAs strict code of conduct or face heavy penalties.
#8 Think About How House Prices Will Affect You
All SHIP members have a no negative equity guarantee on their lifetime mortgages. This means that if the price of your house falls you, or your estate, will not have to pay any extra to compensate.
With a lifetime mortgage, an increase in the value of your house can help to offset the interest on your loan. With a reversion scheme the company will take the agreed share of your property regardless of what happens to property prices.
#9 Check You Entitlement To Welfare Benefits
A large cash sum could affect your entitlement to state benefits. This will depend entirely upon your financial circumstances and it is an issue you should bring up with your financial advisor.
#10 Check How A Plan Will Affect Your Tax Liability
A large lump sum might also affect both your current and future tax situation, but not necessarily for the worse. If your children are looking at a large potential tax bill then releasing some equity in the house now might elevate this. But it is important that you speak to a specialist tax advisor about your personal circumstances.
James Copper is a mortgage broker with over 30 years experience. He works for www.any-loans.co.uk as a secured loan advisor. In his spare time he writes on all things financial.