Essential Guide To Equity Release For Care Costs
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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The benefit is that interest is only charged on cash withdrawn.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.
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The broker will compare options from the following brands only: Aviva, Hodge Lifetime, Just (Just Retirement), Legal & General (L&G), LV (Liverpool Victoria), More2Life, OneFamily, Pure Retirement, Retirement Advantage.
Using Equity Release For Care Home Costs
Equity release for retirement home care costs is by far the most common method people use to raise the capital required. The majority of homeowners (those who own their homes outright) have invested in their property decades ago and are now benefiting from a house price increase. A vast majority of homeowners are sitting on a pile of wealth that’s inaccessible 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 as a lump sum payment to pay for home adaptations or to boost your annual income so you can afford to self-fund your care needs.
Does Equity Release Affect Care Home Costs?
Money released from your home equity is released tax-free; however, it does affect 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 will need to be an outright homeowner over the age of 55. If you have a mortgage remaining on your property, there are some equity release providers that 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%, which is why it isn’t as popular as lifetime mortgages.
Lifetime mortgages will release a percentage of your home equity. The older you are, the higher a percentage of your property wealth you’ll be able to 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’re able to 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, qualification criteria including the types of properties they’ll accept as security. Some will have different criteria for homeowners of ex-council homes, while 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 those with leaseholds in need of 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 that’s in your best interest.
Equity Release Regulation
Equity Release is a highly regulated financial product that’s overseen by two industry watchdogs. The Financial Conduct Authority (FCA) regulates the market while the Equity Release Council set the standards of best practice 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, that 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 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 death of the policyholder or when the last survivor on the policy moves into long-term care – when the home is then 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, there are equity release plan providers able to build in an equity guarantee element. This is done by reducing the equity you’re able to release from your property. As an 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’d able to 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 made annually to prevent interest 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 installments, which is paid towards the interest accrued preventing it 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 on a monthly basis while you’re able to afford it. These types of 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 the need arose. This could be an option for those who don’t need to raise capital for immediate care, but rather for smaller 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 to access 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 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 as 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 if the interest is lower, the minimum fee can apply. This will need to be accounted for if you’re planning to 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, but they rarely include legal fees as you need to arrange advice from your own conveyancing solicitor, ensuring you’re receiving impartial advice.
Equity release providers can, on occasion, 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, working with a number of equity release specialist providers who can then do more than advise as they could also save you thousands by comparing all plan providers across the whole of market to find you the best deal with the most suitable equity release partner based on your circumstances.
Did you know that only 25% of seniors in need of adult care qualify for state funding?
If you’re one of the millions needing to self-fund senior care, there may still be financial support available whether that’s through Personal Independence Payments, Carer’s Allowance or Attendance Allowance. If you choose to use equity release for care costs, it 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 in Scotland, the maximum savings threshold is £25,250. There is a lower threshold of £14,250, which if your annual income is below that, you’ll qualify for full funding support through your Local Authority. It’s estimated that only 25% of the millions of seniors across the UK requiring financial assistance 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, it may be possible to buy an immediate care annuity, which is 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. How these work is you buy the annuity as a one-time payment from an insurance company who then guarantees 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.
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