Raising income/capital from the home
This section looks at equity release schemes that enable older people who own their home to raise income and capital from their home.
Equity release schemes
Older people who own their own home and want to remain there may need to consider raising capital from the home, for example to undertake adaptations, to pay for care services, or to provide an income. There are a number of schemes to raise income or capital on the home; collectively these are often referred to as equity release schemes. There are risks involved in these schemes as property values can decrease, resulting in negative equity, which could result in large debts upon the person's death. Older people should be advised to seek specialist independent advice from a solicitor or independent financial adviser before applying for a scheme.
Those applying for an equity release scheme will usually be expected to meet certain conditions before being accepted. These will vary between schemes, but common conditions include the following:
Age - most schemes usually only accept people age 60 or over, and some have even higher minimum age requirements.
Value of property - most schemes require that the property has a minimum value, usually around £40,000.
Mortgage - applicants usually need to have little or no mortgage left on the property.
Amount of loan - most schemes lend up to 75 per cent of the value of the property.
There are different types of equity release schemes available. This section details the most common.
Home income plans (HIP)
A home income plan is entered into with a finance company such as an insurance company or building society. It involves raising an interest-only loan, up to a maximum of 75 per cent of the value of the property. The loan is secured against the property by way of a mortgage. This then provides an annuity income paid each month for life. Applicants usually also have the option to take a lump sum at the start of the plan, which will reduce the amount of income paid each month. Home income plans are more suitable for people in older age brackets, for example those aged over 75, as they will receive a higher income owing to their shorter life expectancy.
Changes in interest rates may affect and possibly reduce the level of income that is paid. The proportion of the value of the property that is borrowed becomes a charge on the property, repayable when the property is sold, for example because the homeowner has died or gone into residential care.
Some home income plans allow applicants to take out capital protection, which protects part of the loan if they die within a short time after taking out the plan. The income an applicant receives from the scheme will be reduced if s/he takes out capital protection.
If the homeowner moves home, they may be able to transfer the plan to their new property. They may have to repay part of the loan if the value of the new property is less than the value of the old one.
Home income plans are regulated by the Financial Services Authority (FSA). The FSA sets out standards with which companies offering the schemes must comply. The Safe Home Income Plan (SHIP) campaign also has a code of practice, which aims to ensure that companies participating in the campaign provide information about the benefits, objectives, and limitations of their schemes.
Home reversion schemes (HRS)
A home reversion schemes involves selling all or part of the home to a company (known as a 'reversion company') for a percentage of its sale value, usually somewhere between 30 and 60 per cent. The occupier then receives either a lump sum or a monthly income for life. The occupier is allowed to remain in the home for free or for a nominal rent, but upon their death the property will belong to the reversion company.
Most home reversion schemes only accept people over a minimum age, usually 70. There is also usually a minimum value that the property must be worth, and most schemes require that the property is in a reasonable state of repair. The homeowner will usually remain responsible for repairs.
If the homeowner wants to move, then the home reversion company will make a decision about what happens to the property; usually it will be sold. If the homeowner has sold the whole of the property to the company, then if the company sells the property the homeowner will not get any of the proceeds. If they have sold part of the property, the proceeds will be divided between the company and the homeowner.
Home reversion schemes are regulated by the Financial Services Authority (FSA). The FSA sets out standards with which companies offering the schemes must comply. Some reversion companies may be members of the Equity Release Council and should therefore abide by their code of practice. Information about reversion companies is available from organisations such as Age Scotland and Age UK.
Interest-only loans are loans raised against the value of the home. The applicant receives a lump sum, and then makes interest payments. The capital does not have to be repaid until the home is sold or the applicant dies.
Interest-only loans are regulated by the FSA and are available from some banks and building societies.
A roll-up loan or roll-up mortgage is an interest-only loan where both the capital and interest repayments are deferred. This means that all the payments on the loan are not due until the property is sold. The applicant receives a lump sum and/or a monthly income.
When interest rates are high, the amount owed on a roll-up loan can grow very quickly. Some schemes include a guarantee that the amount owed will never rise above a certain percentage of the value of the property.
Roll-up loans are regulated by the FSA, and are offered by a small number of building societies.
Last updated: 9 December 2019