Using Equity Release for Care Fees
Facing the prospect of large care fees is likely to be extremely stressful, particularly if you have limited liquid assets or financial means. Care fees are currently being scrutinised in the U.K. because they appear to be excessive, and in some cases extortionate.
For most people in the U.K., property ownership has been a lifeline for a better quality of life. Property has been a high-yielding investment for homeowners for many decades as they have benefited from capital appreciation. The big question is how you get the money tied up in your property into liquid form to pay the care fees.
The common solution is to seek equity release for care fees, but is this the best option and what do you need to know? Let’s discuss using equity release for care fees.
Who is Eligible for Equity Release?
Equity release is available to you if you are:
- Aged 55 or over
- An owner of a property or purchasing a property that meets an equity release provider’s criteria
- Own at least 50% equity in your property or have a 50% deposit for a purchase
If you meet the requirements, you will need to seek equity release advice as the product is specialist and highly regulated by the Financial Conduct Authority.
There are two types of equity release products in the U.K., both are very different.
The most commonly taken equity release product is a lifetime mortgage. In fact, over 90% of all equity release products used in the U.K. are lifetime mortgages.
With a lifetime mortgage, you borrow money from a lender, typically up to 50% of the equity held in your property. Unlike a traditional mortgage, there are no mandatory monthly repayments, and the interest compounds on the mortgage if no payments are made. The money is then repaid when all owners pass away or move into long-term care.
This means that although you may borrow up to half of your property value, you could live long enough for the total amount outstanding to exceed your total property value due to compounded interest. However, if this does occur, regulated equity release products have a no negative equity guarantee meaning that you cannot owe more than the value of your property. On redemption, if there is a surplus sum over the value of the property, it is written off by the lender.
It is for this reason equity release is heavily regulated as products can disinherit your next of kin and leave estates in debt.
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Home Reversion Plans
Home reversion plans are not loans in the traditional sense. Instead, a plan provider will offer to buy a certain percentage of your equity upfront for a significant discount compared to market value.
There is no interest on a home reversion plan although there may be additional charges depending on your plan provider, such as fees for accepting the plan.
You also can live in your property until you pass away or move permanently into long-term care, which is part of the home reversion plan contract and makes it a financial product.
You may be wondering why home reversion plans are unpopular, and the truth is they provide extremely poor value for money. For example, you may sell £100,000 of equity for £50,000 to the provider, resulting in an immediate equity loss of £50,000.
Can You Use Equity Release for Care Fees?
Yes, equity release can be used for care fees. However, in many cases, it is unsuitable for this purpose.
To understand this, we need to address how care fees work in the UK. There are two ways care fees are charged:
- Long-term care fees for residential care homes/facilities
- Care fees for ‘at-home’ care where you remain in your home and have health workers attend
In the former case, equity release is wholly unsuitable for two reasons:
- The equity release lender will decline the application due to one of the conditions of the loan, which is that you must live and reside in your property
- There are better alternatives for residential home care fees than equity release such as selling the property
If you intend to have care at home, equity release can be a great product as you can remain in your home and cover the ongoing costs of care. However, be mindful that if you do ultimately require long-term care in a care home, that loan will need to be redeemed at that stage.
Can You Continue Living in Your Home After Equity Release?
Yes, with both lifetime mortgages and home reversion plans you can continue to live in your property until you move into long-term care or pass away.
There are a handful of disreputable lenders who may seek to sell your property beforehand, but you can avoid these lenders by ensuring your lender is registered with the Equity Release Council (ERC).
The ERC has a set of standards for its members that among other benefits, prevent them from evicting you from your property until you pass away or need long-term care.
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Alternative Options to Equity Release
For care fees, you should always consider whether selling your property is feasible as you will benefit from the freed-up cash in your property without the financial agreements and compounded interest of equity release. However, it’s understandable if you wish to retain your property to keep your current living standard.
If you are seeking funds to pay for permanent care, selling your property will be more suitable than equity release due to the reasons mentioned above. Whereas, if you want to remain in your home and receive care in your property, equity release is likely to be suitable. With equity release, you can live in your home with the comfort of knowing that you cannot be removed from the property until all owners pass away or move into long-term care.
If your health deteriorates further and you require residential care, taking an equity release product for care costs could be a costly mistake. However, it’s worth noting that with regulated equity release products, lenders currently waive early repayment charges (ERCs) if the loan is redeemed due to death or if you move into long-term care.
Care costs only make up a small percentage of reasons why people take equity release products. By far the most common reason is to have a better quality of living in later life without any fear of being removed from your property.
Speak to a Specialist
An equity release broker will be able to advise you specifically on how equity release products work and what is best for your personal goals and financial situation.
Boon Brokers is a whole of market mortgage, insurance and equity release brokerage. Boon Brokers is a proud member of the Equity Release Council and provides equity release advice and arrangements free of charge. This is unusual for the industry as most equity release brokers charge over £1,000 per case.
Contact Boon Brokers to book your equity release consultation today.