It is increasingly common for retirees to unlock cash by using their property, since this is usually their main asset and means of doing so. However, they should bear in mind “TANSTAAFL”. No, this is not an acronym for a fancy finance product or regulatory body, but for “There ain’t no such thing as a free lunch.”
Joanna Bhatia (LexisPSL Property) looks at some of the schemes for unlocking cash from homes - and sounds a note of caution for those thinking about entering into one.
Equity Release Schemes: the options
Older homeowners want to benefit from the value of their homes without having to move out of them. The ‘Equity release scheme’ is designed to achieve this.
There are two types of scheme:
- lifetime mortgages (the most popular) where there is a mortgage with the compound interest rolled up and repaid on death or the sale of the property; and
- home reversion plans where the owner transfers the property to the funder in return for an income and/or capital and a share in the final sale price. There will be a lifetime lease to the owner.
However, there are risks involved with both.
Equity Release Schemes: the risks
The main issue with lifetime mortgages is that interest on the release is compounded each year so that the debt escalates rapidly. This can create problems for those inheriting from the property owner.
Home reversion plans also have downsides including the fact that the homeowner receives considerably less than the full market value for the property and if the homeowner ends the plan early, he or she would need to buy back the share sold at full market value, which could be a lot more than it was sold for.
Sale and Rentback Schemes or “SRB”s
In addition to retirement products, there are others on the market aimed at helping people realise capital from their homes. A sale and rentback scheme (SRB) involves people selling their home, usually at a discount, in exchange for the right to remain in the property.
SRBs were all but outlawed a few years ago due to the potential for abuse, deception and exploitation and are now subject to strict financial controls (as are the equity release products) following reforms which came into force in 2014 as a result of the Mortgage Market Review.
The take home for homeowners? Take advice!
Homeowners should think carefully and seek financial advice before entering into any such schemes.
For more information on these and similar schemes see our Practice Note: Regulated home purchase and equity release schemes.
Source: LexisNexis Purpose Built
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