The equity release scheme allows for the release of funds from a property’s equity. With this scheme, you can buy and pay for your care outright without having to worry about what will happen when you die or become unable to work. Many people are looking for ways to fund their care needs in later life. This can be done through a care home or by purchasing your own property but there is also the option of an equity release scheme which, according to SovereignBoss.co.uk, has become quite popular.
Equity release schemes offer a way to fund the cost of care for those who no longer have the financial means to do so. These are loans that are paid off with property or other assets, like shares and bonds. This type of loan allows you to secure your future without having to sell your home.
How Does Equity Release Work?
Equity release allows you to convert some of the capital locked up in your home into cash. You have the option of receiving a tax-free lump payment or drawing down lesser amounts of money as needed. The money you put up against the value of your home is refunded when you sell it. When a couple owns a home, the money is usually not repaid until the second spouse passes away.
You have the option of staying in your home until you sell it, go into long-term residential care, or pass away. If you require additional care and support at home in your later years, equity release is a viable solution. However, it’s critical to understand the expenses and potential risks.
What Are the Types of Equity Release Schemes?
The two main types of equity release schemes are:
You agree to sell a piece of your property to a home reversion firm under a home-reversion scheme. In exchange, you will receive a tax-free lump payment. You could wish to sell a lesser percentage at first and then sell larger percentages later to ‘draw down’ other amounts. The debt will not be repaid until the property is sold. The home-reversion company would receive their part of the sale proceeds at that time.
It’s crucial to understand that a home reversion plan will not pay you market value for the portion of your home you sell. In actuality, the rate will often range from 35% to 60% of the market value.
On the plus side, selling a piece of your home will result in a tax-free lump payment, and you’ll be able to live in the entire house rent-free for as long as you desire. It’s vital to understand that, unlike a lifetime mortgage, you’ll lose sole ownership of your property with a home-reversion plan.
You are given a lump sum loan against the value of your home in this type of plan. Some plans let you to take out lesser amounts of money as needed. The larger the money that can be released, the older you are and the greater the value of your property. For example, if you’re 65 years old, you may be eligible to borrow up to 25% of the value of your property, however if you’re 80 years old, you may be able to borrow up to 40%.
The loan has no time limit or end date. Only when the property is sold will the complete amount be repaid. Most plans will also require you to repay the lifetime mortgage if you permanently relocate into a care home or sheltered housing.
Monthly or annually, interest is applied to the total. Most schemes don’t allow you to pay off the interest as you go; instead, it’s all added to the final lump payment. As a result, depending for how long you live, the total sum owed can quickly add up.
What Are the Pros and Cons of Equity Release?
- You can supplement your income with a tax-free lump payment that you don’t have to return until you pass away or the property is sold.
- You are free to stay in your home for as long as you like.
- A lifetime mortgage allows you to keep exclusive ownership of your home.
- Some plans let you to take out smaller lump sum payments as and when you need them.
- A lifetime mortgage might result in massive debt accumulation over time.
- You won’t get the market rate for the portion of your home you sell if you use a home reversion plan. In addition, you will lose sole ownership of your home.
- It’s possible that releasing equity will affect your eligibility for means-tested benefits like pension credit.
- Releasing equity may limit your ability to get local-authority funded care in your home.
When it comes to funding a care, many people think that they can’t afford the high cost of a private nursing home. This is not true! Equity release schemes are an affordable option for those who want to fund their own care.
So, you are considering funding a care with an equity release scheme. This is a great idea to help avoid the stress of worrying how to pay for your long-term care, but there are lots of things that need to be considered first. It’s recommended that you check with financial adviser about this option and whether it works for you.