Equity release

These are lifetime mortgages (‘equity release’) and home reversion plans. To understand their features and risks ask for a personalised illustration.

These are schemes by which people are able to release some of the equity in their home without leaving the house.

Before going any further, let us just say that if you need additional income then usually the most sensible and financially efficient option is to sell your house and buy something smaller, more manageable and cheaper to run, investing the difference to produce an income. This is especially true if your property would be hard to manage if you became weaker or infirm in later old age.

Other alternatives worth investigating are that of renting out a spare room(s), which can provide tax-free income or, (for larger properties) the conversion of part of the house into an apartment and renting that out.

Lifetime mortgages and home reversion plans may not be suitable for most people, so you should consider the terms, conditions and risks very carefully.

The two main types of scheme are:

• Lifetime mortgage – you borrow against your house. You might pay the interest, (e.g the money was for one-off major repairs/renovations and your pension is otherwise reasonable) or, more commonly, the interest rolls up, and when you die or sell the house, you or your estate have to settle the debt. The issue here is to ensure that you understand the maths and the effect of compound interest, as adding interest to the amount you owe will reduce the remaining equity in your home. If you live a long time, or if house prices fall, there may be no equity left for your beneficiaries to inherit.
• Home reversion plans – you sell some or all of your property to an investment fund. You get cash and live there for the rest of your life, but there may be restrictions on moving. (For example if you sold your home fully to a scheme then they might want to ensure that the property you want them to buy meets their requirements. This may prevent you making the move that you would like). Make sure you understand all of your rights and responsibilities, and any restrictions that apply.

For both types of arrangement you are normally responsible for the upkeep of the property (including expenses).

Your property may be repossessed if you do not keep up repayments on your mortgage.

Equity Release refers to home reversion plans and lifetime mortgages. To understand the features and risks, ask for a personalised illustration.

Equity release is not right for everyone.

It may affect your entitlement to state benefits and will reduce the value of your estate.

Never enter into any of these arrangements without consulting a financial adviser.