If you need to fund long-term care and have already paid off, or nearly paid off, your mortgage, an equity-release scheme could be for you. Here’s a simple explainer on how they work.
What is equity release?
Simply put, equity release is a way of using your home to access funds without having to move out. There are two main types: lifetime mortgage arrangements and home reversion plans.
A lifetime mortgage is a loan secured against a home that does not need to be repaid until the borrower sells the property, moves into a care home or dies. A key decision is whether interest is paid at the end of the term, or on an ongoing basis.
Interest roll-up mortgages
An interest roll-up mortgage involves receiving either a lump sum or regular payments. Interest is charged but you don’t have to make regular repayments. Instead, the ‘rolled-up’ interest is added to the loan amount and the total is paid back at the end of the mortgage term when the house is sold.
With interest-paying mortgages, borrowers receive a lump sum and make either monthly or ad hoc payments that reduce or stop interest accumulating. It may also be possible to pay off the capital. Your home is sold at the end of the mortgage term and the loan repaid from the proceeds.
Home reversion plans
Home reversion plans involve selling all or part of your home while staying on as a tenant, paying no rent. The amount you receive will be less than the market value for the property, but no interest is charged. Some schemes allow you to sell parts of your home in stages. Sale-and-rent-back schemes are similar but after selling your home at a discount you stay living there for a fixed period, during which you pay rent.
Joint equity release
A joint equity release plan means if either you or your spouse (or partner) move into long-term care then the other person can stay in the property indefinitely.
Is equity release right for you?
The Money Advice Service (MAS), which is impartial and funded by the government, says: “When it comes to long-term care planning, equity release schemes can be useful, but only if you’re looking to fund care in your own home and you do not qualify for local authority support.”
Interest can quickly mount up. Which? advises that “equity release can be right for some people but it is a very expensive way to get your hands on some cash.”
MAS points out that equity release probably isn’t suitable if you are likely to move into residential care soon – though advice may be different for couples. It’s also important to consider whether releasing equity from your home will affect your tax situation, or any state benefits or local authority support. Some equity release schemes can also restrict your options should you wish to move house.
The Equity Release Council
Check if a potential provider is a member of the Equity Release Council. If so, they’ll be bound by a code of practice that states that customers can stay in their property until they move into long-term care or die. It also ensures products have a ‘no negative equity guarantee’, meaning that your total debt can never exceed the value of the property and won’t be passed on to your family. Visit their website here.
Seek independent advice
Using an equity release scheme is a major step and it’s vital to speak to an independent financial advisor. Look for one with the specialist CF8 qualification in funding long-term care. There’s more information from Step Change, a debt charity. The Money Advice Service also has lots of advice on all aspects of funding care.