Learn how an equity release can help cover the costs of home care
For many in retirement, the question of how to fund their care is a significant concern, especially since their home is often their largest asset. However, tapping into this asset isn’t always straightforward. Most people are reluctant to sell their homes to cover care costs, as they prefer to remain in familiar and comfortable surroundings.
One solution that is frequently misunderstood is equity release. This option has become a more developed and regulated area of personal financial planning in recent years. Today, equity release is a highly regulated sector, overseen by the Financial Conduct Authority (FCA), with advice provided by qualified specialists—a far cry from the less reliable schemes of the 1990s.
Additionally, the Equity Release Council, an industry body, ensures that providers adhere to minimum standards. This guarantees that approved plans are clearly communicated, ethical, and designed to meet the individual’s best interests.
How does an equity release work?
Equity release schemes enable those in retirement to release funds from their homes. The amount you can release is related specifically to age, so the older you are, the more you can release, and there is effectively no age limit. The funds that can be released are linked to the value of the home, so the more the home is worth, the more that can be released.
Schemes run for the lifetime of the applicant(s) and only need to be repaid when the home is permanently vacated or on the eventual passing of the individual. You cannot have negative equity or owe more than the home is worth, and importantly, any equity in the home belongs to the individual or their family on eventual sale. Individuals can also move home and downsize as needs dictate over time.
Interest is charged on funds taken, so it makes sense to only take the funds as they are needed to keep costs low. Interest can either be paid monthly, or if funds don’t allow part or all of the interest can be rolled up and added to the funds borrowed.
Types of equity release
There are two main types of equity release:
- Lifetime mortgage
- Home reversion
Both options allow you to:
- Stay in your home
- Access money from your property, either as a lump sum or through smaller, regular payments
- Use the money for care costs, including home care services, or for other personal needs.
These products are particularly useful if you wish to continue living in your own home while receiving care.
With either option, you’ll need to maintain buildings insurance and cover any home maintenance expenses. While equity release can be an effective solution for many, it’s not the right choice for everyone.
It’s important to seek independent financial advice before deciding if equity release is the best option for you.
Could an equity release scheme be right for you?
Equity release schemes can be helpful when planning for long-term care, but they are generally suited for those looking to fund care while staying in their own home and who do not qualify for local authority support.
If you anticipate moving into residential care soon, equity release may not be the best option, as most agreements require the loan to be repaid in full if you move permanently into a care home.
How much equity could you release?
The amount of equity you can release will depend on several factors, including the value of your home, your age, and the specific product you choose. Some providers may offer higher sums to individuals with certain medical conditions or lifestyle factors, such as smoking.
How much does it cost?
It’s important to be aware of all the associated costs before proceeding with equity release. Potential fees include:
- Legal fees
- Valuation fees
- Buildings insurance
- Early repayment charges, if you pay off the loan early
- An arrangement or application fee from the lender
- Adviser fees for guidance and plan recommendations
- Completion fees, payable either at completion or added to the loan
Other things to consider
Releasing equity from your home may affect your tax situation, state benefits, or local authority support. Additionally, equity release is designed as a long-term solution, so if you need to move to a new home in the future, your options may be limited.
How can I get the funds?
Funds can be drawn down as a small or large lump sum or, as is more popular, on what is called a drawdown basis where money can be taken as needed from the equity in the home up to a defined maximum on a monthly or less frequent basis over the individual’s lifetime.
What can the funds be used for?
Funds can be used for pretty much any reason needed by the individual. Typical reasons are:
- To pay for care at home so that the family retains the home and the individual can stay in familiar and pleasant surroundings where they are most comfortable. Funds can be taken as needed over a period of time to help supplement income or to help pay for the cost of care as needed.
- Paying for home improvements – new windows, a wet room, stair lift, home repairs, new furnishings etc.
- Supplementing pension income to improve their standard of living. Even £3,000 a year could provide an extra £250 of spending money a month.
- To repay an outstanding mortgage or debts where the current bank wants their money back, and this enables the individual to raise funds so they can stay in their home.
If you would like more information, we recommend you seek professional advice. Prestige Nursing & Care has partnered with award-winning Financial Advisers and Equity Release specialist Emerald Finance.
They are offering all Prestige Nursing & care clients and families a free initial consultation. Should you wish to discuss this further and see what options are available to you, they can be contacted on 01903 222940 or at www.emeraldfinance.co.uk.
