What is Equity Finance?
Equity finance is also known as equity release. Basically, it involves converting your home into cash, either as an income or as a lump sum. Equity finance comes in two main forms, lifetime mortgages and home reversion. Here is a brief guide as to how each of these options works.
Lifetime mortgages are the most popular way of releasing funds from a property. They work like traditional mortgages in the sense that you borrow against the value of a property, but unlike traditional mortgages you do not have to repay the money you borrow during your lifetime. Instead, the sum borrowed continues to accrue interest until you die (or move into permanent care) at which point the borrower's home is sold to repay the capital and the interest.
As well as the established options of taking the money as an income or as a lump sum, there are now providers which offer “drawdown” lifetime mortgages, which allow borrowers to release equity as, when and if they wish. There are also “interest-only” lifetime mortgages which allow the borrower to repay the interest and thus keep the balance stable, plus some lifetime mortgages allow users to make voluntary repayments.
Home reversions are where the home owner sells all or part of their home to an equity-finance provider in exchange for a lump sum or an income, plus a guarantee of a lifetime tenancy, which ensures the borrower has the right to live in their home for the rest of their life or until they move into permanent care.
A key point to note about home reversions is that the word “tenancy” has different implications from its standard meaning in the private rented sector. In the context of equity-finance arrangements, the tenant is usually responsible for the standard care and maintenance of the property, including repairs, basically all the tasks that a landlord would usually do. That said, for the most part, tenants do not have to ask their landlords permission before making changes to their home so they can decorate as they wish, even if it means drilling holes.
Equity finance in general
Your eligibility for equity finance will depend on each provider's criteria, however you can expect these criteria to include your age (and possibly your state of health and lifestyle) and, of course, the value of your home.
Money you withdraw from equity release is typically tax-free (as it is technically a loan rather than an income or a cash windfall) but it may impact your eligibility for means-tested benefits.
These days many equity-finance providers will offer a "no-negative-equity" guarantee which basically means that the lender will only ever have a claim on the value of your home and if this is insufficient to pay back everything you owe then the remainder will be written off. This is, however, something you would need to check before signing up.
The money from equity finance can be used as you wish, so for some people it could be a useful way of reducing an Inheritance Tax burden. Essentially, if you gift a property to your heirs, you have to give up all beneficial interest in it, which means you would either have to move out of it or pay them a fair market rent for it on which they would pay tax. If, however, you release the equity in your property, you can make gifts to your loved ones which will be tax-free as long as you live for another 7 years and even if you don't, they may still qualify for a reduction in IHT, via a process known as taper relief.
Equity Release refers to home reversion plans and lifetime mortgages. To understand the features and risks, ask for a personalised illustration.
For pensions and inheritance tax planning we act as introducers only.