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Equity Release For People Over 70 Explained
Retired homeowners in need of finance can access some of the equity they’ve built up in their home. The older you are at the time of borrowing, the more favourable the interest rates are. This makes equity release for over 70s an attractive option. It’s not always the best option, though.
Regardless of your age, you are going to need professional advice preferably from someone impartial and with an active membership to the Equity Release Council, which is the industry watchdog overseeing fair practice and transparency across the equity release market.
Reputable firms are members of the Equity Release Council, but there are others who may be reputable but aren’t members. There are fewer safeguards in place, which is why it’s advised to work with an independent equity release advisor who works with a panel of authorised partners that are members of the Council, as the No Negative Equity guarantee then protects you.
Whether a provider is a member of the Equity Release Council or not, they must make sure you have received financial advice before you can join a plan.
To apply for a policy, you and your advisor will first agree that it is suitable for your circumstances. When the plan provider is a member of the Equity Release Council, you’ll be required to have at least one face-to-face consultation with a solicitor. This can be the plan providers solicitors or your own, but they’re obliged to act independently, ensuring they act in your best interests regardless of who pays their fees.
Equity release for over 75s can be less accessible depending on the type of property you own. There are conditions on property types accepted by lenders with most requiring your property to be freehold. Leasehold retirement housing won’t be acceptable for most providers. Interest rates tend to be more attractive the older you are when you take out an equity release plan.
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The Different Types of Equity Release
There are two main types of plan available, both being lifetime mortgages. Equity release plans involve releasing some of the equity you own in your home. Home reversion plans are selling part or all of your home equity to an equity release provider; however, home reversion plans are less common.
The most common type of equity release for over 75s are using a lifetime mortgage with interest roll-up. With this type of plan, you can release a cash lump sum, usually a minimum of £10,000 and then make no repayments. Instead, your loan continues to accrue interest until the last surviving partner on a joint loan dies, at which point the home is sold and the loan repaid with interest.
The executor of your estate will be responsible for selling your home and then repaying the loan (capital plus interest accrued) to the equity release provider after the property sells.
The majority of equity release plans have a no negative equity guarantee, ensuring there’s never more owed than your home’s value, but these only apply when you work with an approved lender who is registered with the Equity Release Council. To be members, they need to be regulated by the Financial Conduct Authority. There are many safeguards in place to protect consumers; however, there are still nuances you need to be aware of before giving equity release serious consideration.
The Direct Costs for Equity Release
There can be upfront fees to arrange equity release, and these need to be your opening discussion with any advisor. Financial advisors can be paid their fees directly or by commission from equity release providers. Some though, take both. A fee from you directly and a commission on the plans.
Any advisor you’re considering working with, ask them what their fees are and who pays. If it’s a one-off fee, those will need to be paid directly by you to the solicitor. For commission-only fees, those are paid by the plan provider if you choose to go ahead with the policy.
Application and arrangement fees are another cost that may be required by plan providers. These are generally from £700 and upwards.
The arrangement fee on some plans can also cover a property valuation report; however, this will only be for the lender’s purposes to decide on how much they can approve a lifetime mortgage for. Check to see if the property valuation is included as part of the arrangement fee or if there’s a separate fee payable.
There will also be legal fees involved. Depending on the plan provider, there can be contribution-based schemes available, providing some financial support to cover legal fees and arrangement fees. These vary by provider.
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The Impact Of Equity Release For Over 70s On Pension Credits
Using equity release for over 70s will have an impact on means-tested benefits, which include financial support for council tax and your pension credits. Equity release for over 75s can be complicated when pension credits are in place as there can be assessed income periods (AIPs) involved. If there are, you will need to speak to a specialist financial advisor.
Income from equity release for over 70s with an open-ended assessed income period do not need changes reported, but that only applies to income. Not to capital. When you take a cash lump sum through a plan, the money is treated as capital. For those taking equity release at 70 without an indefinite AIP, capital over £10,000 needs to be reported. The income aspect from equity release is to do with the drawdown facilities when it’s used for regular payments.
The only time the Pension Service may waive the means-test on capital from equity release is when you’ve needed to use the money to pay for urgent home repairs, but even then, it’s only going to be for 12-months. Your income and capital will be reassessed the following year.
Care needs to be taken when pension credits or any means-tested benefit is involved as the money from a lifetime mortgage is yours to do as you like, but the benefits are not always an entitlement. For example, any savings over the £10,000 limit will lower the amount you get from pension credits. Savings above £16,000 stop council tax benefit.
If you plan on using some cash for yourself and giving some away to family members such as bringing forward part of their inheritance, you need advice from your financial advisor as the pension service and your local authority may treat it as a deprivation of assets, which is fraud. The term describes gifting assets – money, property or income – to a third-party so that they won’t be included in a financial services assessment for support through the social care fund to help with healthcare in senior years.
When considering equity release for over 75s and on pension credits, you need to be aware of the exemptions that the capital released can be put towards. Those include some home repairs that are essential to your wellbeing, debt consolidation and buying a new car, provided it is for mobility purposes such as replacing a Land Rover that’s difficult to get in and out of to a people carrier that’s been adapted for wheelchair access.
There are a number of exemptions on equity release for over 70s with pension credits in place. A financial advisor experienced in the over 70s market and dealing with complex pension issues and means-tested benefits will be able to advise you better on what’s available for your unique situation.
Using Equity Release for Care Planning
Financing home care in your senior years can be expensive. Equity release for over 75s is only suitable when it’s used to help finance home support in the long-term. For anyone who feels they may require assisted living, such as retirement accommodation or moving into a nursing home, equity release is unlikely to be suitable. The reason being, by its nature as a lifetime mortgage secured on your home, the loan is repaid when you move into long-term care. If that’s something you expect to happen in the near future, such as under five years, it’s unlikely to be suitable.
To fund care at home, it can be, but only after your local authority has carried out a means-test of your circumstances. For the purposes of being assessed for financial support for home care with your local authority, your home is excluded. Savings, benefits and capital available are assessed, so when you release equity from your home before a financial assessment, the money released can impact your affordability assessment.
If you’re already receiving financial support for care services at home, equity release can trigger a re-evaluation after which you can be asked to pay contributions towards your care package or to pay all of it, depending on how much your savings have increased by.
About Interest Serviced Lifetime Mortgages
The majority of equity release plans open to those from aged 55 are based on interest roll-up, or you can pay up to 10% (on select plans) interest each year without penalties because of early repayment charges.
Equity release for over 70s tends to have more flexibility to suit different needs. One of those is taking into consideration joint applications because the financial situation will change when one partner passes or moves into long-term care. Based on a joint application, both incomes are included, which can mean you can afford to contribute up to 100% of the interest, but only when the two pension incomes are available.
When the income reduces to a single pension, it can mean the surviving partner isn’t able to contribute as much to the interest repayments.
While both people are living in the home, an interest serviced lifetime mortgage can be set up similar to a retirement interest-only mortgage where you pay the interest, preventing it from reducing inheritance as much, then later, should the interest repayments become unaffordable, it can then be converted (sometimes automatically) onto interest roll-up.
On an equity release plan like this, it can mean preventing compound interest reducing your estate value while you’re able to afford to make the repayments, then start making no repayments and let the interest accrue when your financial situation requires it.
Lifetime mortgages affect both your current financial situation and your family’s future inheritance, which is why it’s imperative to get the best advice from an experienced equity release adviser before proceeding. They will go through all the various alternative options available, including the financial support from the means-tested benefit you may be entitled now and aren’t claiming.
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