Equity Release: the facts

The best deals charge around 6 per cent interest. At the time of writing, Just Retirement offers a lifetime mortgage at 5.99 per cent, while GE Life charges 6.1 per cent. How much you can borrow depends on your age and life expectancy, and the value of your property.

Lifetime mortgages are generally available only to people over 55.

Drawdown

This is a type of lifetime mortgage. The main difference is that you don't request the full sum of money available to you immediately. Instead, you decide on a maximum amount you want to release, and drawdown the cash in stages when you want to.

Home reversion

In this type of scheme, you sell a proportion of the equity in your home in return for a lump sum or 'lifetime lease'. You retain the right to live in your home until you die or have to go into care.

When you end the plan, die or go into care, the reversion provider sells the property, takes their share of the money and pay the balance, if any, to you or your estate.

If you borrow 10 per cent of your property's value, the home reversion provider receives 10 per cent of the value of your property when it is sold, regardless of how much it might have increased in value. The remaining money from the sale goes to your estate.

Home reversion has one significant drawback: when you sell a portion of your equity, you will receive less for it than if you sold it on the open market. This lower price is the price you pay for receiving a lump sum and retaining the right to live in your home.

The older you are, the more you'll get for the stake you sell, and the more you'll be allowed to borrow. These plans are usually only available to homeowners over the age of 65.

Home Income

This method of raising equity is the simplest, and oldest. You take out a fixed-rate mortgage secured against your home. The money is used to buy an annuity, which purchases a guaranteed income for the rest of your life. The downside in this type of scheme is that the level of income you get from an annuity depends entirely on what annuity rates are when you purchase.

Protecting yourself

The major risk with equity release is that you give up a lot of equity in return for a small amount.

Discuss your plans with your family and work through the advantages and disadvantages. You may be better off trading down to a smaller home.

If you are unsure of what a plan entails, seek professional advice from an equity release specialist. Have a solicitor check the paperwork.

Whatever type of scheme you go for, it is highly recommended that the loan provider you choose is a member of SHIP.

The protection membership of this company offers means that if you get into a situation where property prices fall and you owe more than your home is worth, or if you live longer than expected, you won't lose your home. For more information, visit the SHIP website.

Inheritance tax

With a lifetime mortgage, the value you have in your property will reduce over time, possibly to nothing. With home reversion, the proportion of the value of your property you keep will immediately be reduced.

So in both cases you will reduce the amount of any inheritance you leave. Your tax and welfare benefits may also be affected.

Penalties

Lenders usually charge an exit fee or redemption penalty if you opt out of an equity release scheme within five years of taking it out. A few providers do not charge for switching if the amount borrowed is less than £25,000. Age Concern and Northern Rock now offer lifetime mortgages with no exit fees.

Deals are more flexible than they used to be. Northern Rock and Age Concern have plans where, instead of taking a single large lump sum, you can draw down a monthly amount of at least £50 or a combination of the two.

With Prudential, you can take out £20,000 initially and smaller lump sums of at least £5,000 later. Many plans can now be moved from one property to another.

Potential lifetime mortgage borrowers should ask about the rate charged on the loan and whether it is applied monthly or annually - this can make a difference when comparing deals.

More information

Age Concern publishes a free factsheet, Raising Income or Capital From Your Home. Download it here.

Key Retirement Solutions (www.keyrs.co.uk) is an established independent adviser in the field of equity release. It offers a free consultation, extensive guides to the different types of plans and has a find a solicitor service.