Equity Release Lending
Equity release lending is a financial product that allows homeowners to access the value tied up in their property without having to sell it. This form of lending is particularly popular among homeowners aged 55 or over who may have significant equity in their homes but limited liquid assets.
There are two primary types of equity release products available: lifetime mortgages and home reversion plans.
Lifetime Mortgages
A lifetime mortgage is a loan secured against the home. Homeowners retain ownership of their property, and interest on the loan can either be paid regularly or rolled up into the loan amount, meaning no repayments are required until the homeowner passes away or moves into long-term care. The loan, plus any accumulated interest, is repaid from the sale of the property at that time.
Key Features:
• The homeowner retains ownership of the property.
• Interest can be paid or added to the loan.
• The loan is typically repaid upon death or moving into long-term care.
• Some products offer a "no negative equity guarantee," ensuring that the repayment amount will not exceed the value of the property.
Home Reversion Plans
Home reversion plans involve selling a portion or all of the home to a reversion company in exchange for a lump sum or regular payments. The homeowner can continue to live in the property, rent-free, until they pass away or move into long-term care. Upon sale of the property, the reversion company receives its share of the proceeds.
Key Features:
• To take out a home reversion plan you must be aged 65 and over.
• Part or all of the property is sold to a reversion company.
• The homeowner retains the right to live in the property, rent-free.
• The proportion of the property sold determines the share of proceeds the reversion company will receive.
• Typically, the lump sum received is less than the market value of the share sold.
Regulations and Protections
Equity release lending in Scotland, like in the rest of the UK, is regulated by the Financial Conduct Authority (FCA), ensuring that products are safe and fair for consumers. Additionally, the Equity Release Council (ERC) sets industry standards, including the "no negative equity guarantee" and the right to remain in the property for life.
Considerations and Risks
While equity release can provide financial relief and improve quality of life, it also comes with risks and considerations:
• Impact on Inheritance: Equity release reduces the value of the estate, affecting the inheritance left to beneficiaries.
• Costs and Interest: Interest rates on lifetime mortgages can be higher than standard mortgages, and the rolling up of interest can significantly increase the total amount owed.
• Effect on Benefits: Receiving a lump sum or regular payments can affect eligibility for means-tested benefits.
Market Trends
The equity release market in Scotland has been growing, driven by an aging population and rising property values. More providers are entering the market, offering a wider range of products tailored to individual needs. Technological advancements and increased awareness have also contributed to the market's growth.
Prior to considering equity release to liquidate assets, homeowners must consult with a lawyer to discuss the options available to them.
In the next of our Ask the Expert series, we give advice and guidance surrounding why you should consider equity release as a form of freeing up funds for another purpose.
Our next session will be held on 9 July 2024 by our local expert Fraser Symon.
To book a time with Fraser to ask a question about care homes and/or support at home contact us on:
📩 asktheexpert@parissteele.com.
Our dedicated expert will be happy to provide initial advice, signpost you to additional sources of support or provide a fee quote for more in-depth assistance.