Self Funding Care Guide – Releasing Equity from your Home
One way to obtain capital when care is needed is to sell your home however, if you are not yet ready to go into a care home and just require care at home then this will probably be an unsuitable option. There is another way of raising funds from your home without the need to move out of the property or to sell it; this is known as equity release.
There are two main types of equity release; Home Reversion plans and Lifetime Mortgages.
Home Reversion plans:
This plan allows you to sell a share of your property and become a co-owner whilst retaining the right to live in your home for the rest of your life. The sum you receive is based on value at the time you ‘sell’ the part of the property. You are usually able to sell between 25% and 100% share of your property to a provider however the amount you receive will be significantly less than the share you surrender. The older you are, the more you’ll get, but at age 65, for example, a 20% advance can mean surrendering 70% of your property’s value.
‘Which’ looked at the cost of a Home Reversion plan from three different providers in February 2013:
For a 65-year-old couple with a home worth £250,000, Bridgewater would advance £50,000 as a lump sum (20% of the home’s current value), in exchange for a 72.3% share of the property. If property prices rise by 1.5% each year, the £250,000 house would be worth £336,714 after 20 years. At this point, the firm’s share would be £243,578 and the couple’s £93,135. In the same scenario, Newlife would take a 73.8% stake in the property (worth £248,495), leaving the couple £88,219, while Hodge Lifetime would take 59% (worth £198,661), leaving them £138,053.
Home Reversion plans appear more expensive than a Lifetime Mortgage unless interest rates were to rise or house prices to all significantly.
This allows you to secure a loan against the value of your home; the loan is repaid if you go into long term care or die. The interest against the loan is usually at a fixed rate – unlike conventional mortgages where interest is charged on an amount that decreases with time, interest on lifetime mortgages is charged on an increasing sum, so your debt can grow quickly. This is because you don’t make any repayments, and therefore the interest on the loan is added to your debt on a continual basis.
There is strict lending criteria for Lifetime Mortgages; the minimum age is usually 55 or 60 and the amount you can borrow will depend on your age – as with Home Reversion plans, the older you are the higher the amount you can receive. There are minimal loan amounts, these usually range from £10,000 to £20,000 and your home would have to meet a minimum value.
There are different Lifetime Mortgages available:
Lump-sum: this is a lump sum loan where the interest is ‘rolled up’ over the full term – you don’t have to pay anything during your lifetime but the interest is compounded year on year until you die or go into long term care.
Drawdown: this allows you to take a smaller amount at the outset and draw down further borrowings as and when you require.
Interest repayment: this allows you to take a lump sum but to pay off some or all of the interest during the life of the loan.
Enhanced lifetime mortgages: this allows those with a lower than average life expectancy to obtain a higher amount of money.
The cost for both options can be considerably high and in some cases can drain almost all of the value of your home. Before making a decision, it is imperative that you obtain professional, expert advice to be sure you have looked at all other options and are making the best choice.