Top Ten Tips: Equity release

EQUITY release is an increasingly important part of retirement planning in Scotland as the subdued housing market limits opportunities to downsize and pensioners look to boost their pension income. Scott Rasmusen, partner at Edinburgh law firm Gibson Kerr, explains the pros and cons of equity release and how to arrange the best scheme for you.

1 What is equity release?

An equity release scheme lets you unlock money from your property as a lump sum, regular income or both while giving you and your partner the right to remain living there until you die or move out. These schemes essentially allow you to borrow money against the value of your home, with the debt repaid from the sale proceeds once you die.

2 How does it work?

The main types of equity release schemes are lifetime mortgages and home reversion. The former involves taking out a new loan on your property, while home reversion involves selling all or part of the ownership of your home.

3 Why choose equity release?

Equity release can provide a way of getting income from a property to make daily life more comfortable in retirement. It is also an especially appealing prospect for retired people who have no family or children they feel obligated to leave their property to when they die.

4 Who can use it?

In most cases you will need to be at least 55 years old and preferably over 60, own a property in reasonable condition and have no outstanding mortgage. If there is still any outstanding balance on your mortgage you may still be able to arrange equity release, but you will need to use some of this money to pay down your existing loan.

5 Tax and other benefits

All money released from the value of your property is free of tax, although if you then invest this money you may be liable to pay tax on any income or growth from the investment. In some cases, it is possible leave some of the property's value to your family.

You can also use equity release to pay for care bills without having to sell your property to do so.

6 Inheritances

Equity release can help mitigate inheritance tax (IHT) on assets you want to leave to your family. Instead of passing your property to your next of kin, who will be liable to pay IHT on it, you can use equity release to secure a lump sum of cash to pass on before you die.

7 Avoid the pitfalls

Always look for plans that carry the Safe Home Income Plans logo (Ship), which represents the industry body that promotes safe equity release schemes. This will provide important guarantees, such as maintaining the right to live in your property for life, the freedom to move home without incurring penalties and ensuring that you never owe more than the value of your property. However, if you are in poor health, you may want to avoid a scheme that pays you a monthly income, as it is possible you may not live long enough to get the best return from it.

8 Watch the costs

Interest rates on equity release schemes are higher than on traditional mortgages. Equity release plans may also involve paying valuation and legal fees, which may only be refunded if you go ahead with the plan. You also remain responsible for repairing and insuring your home and paying all bills.

9 Any alternatives?

Equity release is not the best option for everybody. If you have other assets or investments which could boost your income or provide the lump sum you need, then equity release should be unnecessary. And look at whether moving to a less expensive property would be a more suitable way of freeing up money tied up in your estate.

10 Get the right advice

Equity release plans can be complex and are a major step, so it's vital to get good, independent advice from a financial adviser or family law expert before starting.