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  • Guy Swinnerton

A Quick and Simple Guide to Equity Release

Equity release schemes and their close relatives, sell and rent back schemes, are both ways of increasing the funds available to people in retirement. While both are legal and both are regulated by the FCA, signing up to one of these schemes can have significant implications, and anyone thinking of doing so would be well advised to seek unbiased advice from professionals, such as financial advisers.

Equity release schemes come in two basic forms. By far the most common is the lifetime mortgage. Essentially, the value of the equity in your home (or a portion thereof) buys you a cash sum or an income for life (or a combination of both). The key difference between lifetime mortgages and standard ones is that the interest is deferred until death (or until the home is sold). It is, however, compounded throughout the duration of the loan. In short, this means that the effect of the compound interest can mean that the sum repaid to the retirement service is vastly greater than the sum originally borrowed.

The other option is home reversion schemes, you exchange the ownership of some or all of your home for a lump sum of cash, and the right to remain in the property, free of charge, for as long as you live and you can continue to live in your home, rent-free, until death. These schemes are still very unusual in the UK.

Sell and rent back schemes are schemes whereby companies buy properties for below their market value and rent them back to their original owners. At this time, rental contracts are typically Assured Shorthold Tenancies for 6 to 12 months. In theory, these tenancies can be extended, however there are often no guarantees that the tenancy will be extended at all, let alone that the rent will stay the same. These schemes are unlikely to provide the security of tenure that many people want from their retirement house.

Signing up to any of these schemes can also have implications for your other financial arrangements, for example they may leave you over the threshold for means-tested benefits. It is therefore absolutely vital that anyone contemplating signing up for any of these schemes fully understands all the possible consequences.

It is equally important to consider all the alternatives to these schemes, for example, selling the house. This then raises the question of where else to live and whether it would be best to buy or to rent. Taking advantage of the government's rent-a-room scheme may be another option. This allows people to earn up to £4,250 a year tax free by renting out a room in their home. Those who are looking to raise funds to adapt a home to make it more suitable for people with reduced mobility may find that they are eligible for financial assistance.

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