Essential Guide To Equity Release For Care Costs
Are you looking for a way to pay for care costs and fees? Equity release for care costs is an increasingly popular option that can help you access the value of your home without having to move out.
With equity release, you can use the money tied up in your property to cover your care costs. It’s a great way to ensure you have the financial resources available when you need them most. Plus, no monthly payments are required – so you don’t have to worry about additional financial burdens.
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Are you over the age of 55 and looking to increase your financial stability and security?
Equity release schemes may offer the perfect solution. More than 390 such plans are available in the UK, allowing you to find one that fits your needs now and for the future.
You don’t have to worry about sacrificing your inheritance, either. With inheritance protection, you can set aside part of your property’s value to be passed on when the time comes, no matter how much the loan grows.
Getting an equity release quote is fast and easy. All you need to do is fill out our secure online form, which only takes a minute or so. Get started today and see if this option could work for you!
Using Equity Release For Care Home Costs
Equity release for retirement home care costs is the most common method people use to raise the capital required. Most homeowners (those who own their homes outright) have invested in their property decades ago and are now benefiting from a house price increase. Most homeowners sit on a pile of inaccessible wealth until the property is sold.
For seniors who perhaps aren’t fit enough to cope with a home move, such as downsizing from an upstairs-downstairs into a smaller-sized bungalow and don’t need immediate nursing care, releasing some of the wealth tied up in the property can be an excellent method to access the cash needed.
This can be either a lump sum payment to pay for home adaptations or boost your annual income so you can self-fund your care needs.
Does Equity Release Affect Care Home Costs?
Money released from your home equity is tax-free; however, it affects all means-tested benefits, including funding assistance through your Local Authority and income top-ups via Pension Credits.
To be eligible for equity release, you must be an outright homeowner over the age of 55. If you have a mortgage remaining on your property, some equity release providers will arrange a lump sum payment, provided part of the cash released is used to pay off the remaining balance on your mortgage.
Most plans require homes to be valued at a minimum of £70,000, offering around 14% to 19% LTV (loan to value) ratios, and have a minimum lump sum payment of £10,000 if you’re using a lifetime mortgage, which is the most common type of equity release. The alternative to a lifetime mortgage is a home reversion plan.
With a home reversion plan, you’d sell a percentage of your home equity to a plan provider. However, they usually only pay a percentage of the market value, meaning you’d be selling part of your home equity for way below its current market value. This can be as low as 20%, so it isn’t as popular as lifetime mortgages.
Lifetime mortgages will release a percentage of your home equity. The older you are, the higher the percentage of your property wealth you can release.
The highest percentages are paid to those over 90 years of age, with some equity release plans for over 75s releasing as much as 40% of your property wealth either as a tax-free lump sum or as a one-off smaller payment, followed by partial payments up to a pre-determined amount. This is referred to as a Lifetime Mortgage with Drawdown.
Using drawdown, you can release (usually) £10,000 as a first payment, leaving the rest of your approved amount on reserve. The total you can release is based on your current home valuation and the LTV percentage an equity release provider will offer.
Each plan provider has different rates they’ll pay, various interest rates, and qualification criteria, including the types of properties they’ll accept as security.
Some will have different criteria for homeowners of ex-council homes. In contrast, others can require homes to be of standard construction, such as excluding those with flat roofs with only a few plan providers willing to approve equity release funding on leasehold properties.
For those with a leasehold property, most will require at least 99 years remaining on the leasehold to be eligible for equity release. There are specialist equity release providers for leaseholds needing equity release for care costs; however, you will need to speak to a specialist financial advisor who is independent of any equity release provider to ensure you receive impartial advice in your best interest.
Equity Release For Short or Long-Term Care Options
Drawdown Equity Release Plans
Provide you with an overall flexible cash facility. An initial lump sum is taken, and the remaining cash is then drawn down as & when required. The benefit is that interest is only charged on cash withdrawn.
Lump Sum Equity Release Plans
Lump sum equity release schemes provide a one-stop cash withdrawal. They are best for people who know they will require one withdrawal. After a length of time, certain plans can be reviewed for a top-up depending on criteria.
Equity Release Regulation
Equity Release is a highly regulated financial product overseen by two industry watchdogs. The Financial Conduct Authority (FCA) regulates the market while the Equity Release Council sets the best practice standards for plan providers to abide by, requiring lenders providing equity release to homeowners to abide by the Council’s code of conduct.
This includes providing homeowners with a no-negative equity guarantee, ensuring that no matter what age you are when you take out an equity release plan, upon a life event triggering the repayment of the loan, it won’t be possible for more to be owed than your property’s worth.
If you’re considering equity release, financial advisors will advise you to use a provider who is a current member of the Equity Release Council and approved to provide the type of equity release you require, and that is provided an independent financial advisor assesses you as being eligible for this type of finance.
They will go through a list of possible alternatives to be certain that taking out a lifetime mortgage is appropriate for your financial situation, both in the present and in the long term.
How Your Equity Release Loan is Repaid
It’s important to understand that when you use equity release for care costs, you aren’t just releasing equity early from your home to avoid the need to sell it. Equity release is better known as lifetime mortgages as that’s easier to understand because most homeowners will be familiar with how mortgages work.
You get an advance to buy your home, then repay the lender the capital you borrowed with interest. That’s the same for lifetime mortgages, with the only difference being you don’t need to make any repayments for the life of the loan.
The lender is repaid the capital plus interest upon a life event – either the policyholder’s death or when the last survivor on the policy moves into long-term care – when the home is sold. This will be the responsibility of the executor of your Will.
How Much is Repayable on Equity Release
The interest rates on lifetime mortgages are often fixed at the outset and last for the duration of the mortgage or index-linked to rise, or lower, in line with inflation. The longer the loan is active, the more interest is accrued, raising the amount owed on the loan.
Most plans are estimated to double in interest every 14 years due to plans using compound interest. This means that interest is accrued on interest charged, which is why the Equity Release Council insist on members including a no-negative equity guarantee. If it weren’t for this, it could be possible for more to be owed on your home than your home eventually sells for.
For those concerned about the interest roll-up affecting the inheritance left to your loved ones, equity release plan providers can build in an equity guarantee element.
This is done by reducing the equity you can release from your property. For example, if you’re eligible for 30% LTV, you could split that and take 15% of the value of your home, leaving a further 15% on reserve to leave to your loved ones from the sale of your home.
In this case, if your home were valued at £200,000, you could release £30,000 instead of £60,000 while keeping 15% of your home’s final selling price as an inheritance for your beneficiaries named on your Will.
An alternative that’s become more acceptable by lenders is allowing up to a 10% interest repayment to be made annually to prevent interest from accumulating as fast on the loan. Some will require a payment schedule, such as a minimum of six annual payments with a minimum of £500 instalments, which is paid towards the interest accrued, preventing it from rising as high as it could.
Arrangements can also be made at the outset of your plan to release a proportion of your home equity and pay the interest every month while you can afford it.
These lifetime mortgages might be ideal for those with enough surplus income from their retirement income to make the excess payments while benefiting from the flexibility of switching to interest roll-up if needed.
This could be an option for those who don’t need to raise capital for immediate care but rather for more minor adaptations to your home, such as installing outdoor rails, a ramp for wheelchair access, a stairlift or other mobility aids to help you remain in your home instead of going into long-term care.
By using an equity release plan with monthly interest repayments, you could benefit from taking out what’s similar to a standard mortgage but without being required to meet affordability testing requirements, as the interest isn’t mandatory for the life of the loan due to it being able to switch onto interest roll-up, negating the need for monthly payments.
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Fees To Use Equity Release For Care Costs
If you plan on using equity release for care costs, you’ll need to consider the cost of accessing the money tied up in your property. Financial advice is required before a plan provider will consider your application. Financial advisor fees can be fixed or based on a percentage of your loan amount.
Generally, independent financial advisors may charge around £995 to £1,495 as a fixed fee, with others requiring no upfront payment but instead deferring your advice fee and then charging a percentage of your loan amount, such as 1.99%, which would mean if you were to release £75,000, the cost at 1.99% would be around £1,492.
You should also ask about any minimum fees if your advisor is basing their fees on a percentage of your loan value. Some may have minimum fees applied if you only release the minimum – usually £10,000.
The interest fee could be 1.99% but subject to a minimum £1,495 fee, so the minimum fee can apply if the interest is lower. This must be accounted for if you use the capital released to pay your financial advisor.
In addition, equity release plans can have arrangement fees, often ranging between £1,000 and £3,000. These can include conveyancing fees such as a home valuation report. Still, they rarely include legal fees as you need to arrange advice from your conveyancing solicitor, ensuring you receive impartial advice.
Equity release providers can occasionally provide financial assistance such as cashback upon approval to help with financial fees or provide money towards your legal fees and financial advice fees.
The best approach to finding the best providers is to work with a financial advisor experienced in equity release who can act as a broker/intermediary.
They can work with several equity release specialist providers who can do more than advise. They could also save you thousands by comparing all plan providers across the market to find the best deal with the most suitable equity release partner based on your circumstances.
Did you know that only 25% of seniors needing adult care qualify for state funding?
If you’re one of the millions needing to self-fund senior care, financial support may still be available through Personal Independence Payments, Carer’s Allowance or Attendance Allowance.
Choosing to use equity release for care costs can affect your ability to meet the qualifying criteria for financial support through Local Authority Funding.
To be eligible for Local Authority Funding, the maximum capital threshold for savings is £23,250 in England, £23,750 in Wales and Scotland, and the maximum savings threshold is £25,250. There is a lower threshold of £14,250, and if your annual income is below that, you’ll qualify for full funding support through your Local Authority.
Only 25% of the millions of seniors across the UK requiring financial assistance are estimated to qualify for the full financial support package. Those with annual incomes above £14,250 may still be able to access partial funding. For those who need to move into a care home, the value of your home may be considered as part of the financial assessment.
Using Equity Release to Buy an Immediate Care Annuity
For those who need immediate care, buying an immediate care annuity may be possible, also known as an Immediate Care Plan. Data from the Personal Social Services Research Unit (PSRRU), back in 2011, estimated the cost of an Immediate Care Annuity to be £69,000.
You buy the annuity as a one-time payment from an insurance company and then guarantee a set income level for the rest of your life.
These can be beneficial if you require a care plan in the near future. It may be possible to release equity from your home to buy an Immediate Care Annuity.
However, you will need the assistance of an experienced financial advisor to be sure that 1) Equity release is indeed the best way for you to raise capital to fund your care needs and 2) that an Immediate Care Annuity is the right type of product suited to your circumstances.
Existing Equity Release Plans – What Happens If I Go Into Care?
If you take out an equity release plan and then go into care, your plan may be affected differently depending on the plan you have taken out. Generally speaking, lifetime mortgages are more flexible than home reversion plans when it comes to going into care.
With a lifetime mortgage, you can usually continue making payments as normal while in care. However, suppose your payments become unaffordable due to changes in your circumstances, such as reduced income or increased costs of living in a care home. In that case, some providers may allow you to suspend payments for a while.
Home reversion plans are less flexible than lifetime mortgages regarding going into care. With this type of plan, you will usually have to sell your property once you enter long-term residential care and use the proceeds from the sale to pay off any remaining debt on the plan.
Equity release is a viable option for those looking to fund their care costs in the long term. It can be a great way to supplement pension income, provide extra financial stability, and give you control over how and when to use your money.
However, it’s important to carefully research all available options before making any decisions and ensure that whichever provider you choose has experience in providing equity release services. With careful consideration and sound advice, getting equity release could be a great option for those needing extra funds to cover their care costs.
Overall, getting equity release can be a beneficial funding source for seniors struggling with their care needs. Not only does it give individuals more control over their finances, but it also helps them retain ownership of their assets during a time when they need money most.
The process can involve paperwork and searching for the best rates, but the benefits often outweigh these short-term inconveniences.
Equity release provides people with a secure financial future that pays for current care costs and sets them up for a more comfortable retirement.
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