Money Q & A: How can I release the equity locked in my home?
Sunday 26 December 1999
There are mortgage products, known as equity release schemes, which are available for people in your situation. Pioneered by Bank of Scotland with its highly popular Shared Appreciation Mortgage (SAM), Barclays followed soon afterwards with the similar Protected Appreciation Mortgage (PAM). These schemes enabled borrowers aged 60 and over to release equity in their homes even if they did not have the income to cover the loan. The mortgage only became due once the property was sold.
Regrettably, the SAM is no longer available and the PAM - which is currently only available to borrowers in Wales and the South-west - will be withdrawn until further notice on 2 January.
But two similar schemes have recently come on to the market. Last month Norwich Union launched the Flexible Cash Release plan, which is available to single and joint borrowers aged 60 and over. (If you are a couple, you both have to be aged over 60 to benefit from this scheme.)
The amount that can be borrowed is tiered between 18 and 45 per cent of the property value, depending on your age. No monthly mortgage payments are due as long as one or both of you reside in the property. Once the property is sold the mortgage will need to be repaid plus interest, which is charged at a compound rate - currently 7.85 per cent.
Northern Rock has a similar scheme available for the same age bracket called the Home Equity Release scheme. The amount you can borrow on this plan is also tiered depending on your age. The tiers start at 20 per cent of the value of a property for those aged between 60 and 65 and increase to a maximum of 40 per cent for those aged 85 and over.
The current interest rate of 7.75 per cent is fixed for the term of the loan and added to the account annually. As with the Norwich Union scheme there are no monthly payments and the loan becomes due once the property has been sold.
You own a property worth pounds 400,000. So assuming you do not have an existing mortgage on this property, you are eligible to borrow up to pounds 84,000 (the loan to value is based on the younger person, which is your wife, so the maximum you can borrow is 20 per cent of the property value).
Assuming you then keep the mortgage for five years, the total amount repayable on redemption would be approximately pounds 122,002 plus fees (pounds 84,000 loan plus pounds 68,002 interest).
It is worth remembering that as you will be using this money to enable your daughter to buy a property that will be used as her main residence, she may be liable to inheritance tax if either you or your wife dies within seven years of gifting this money.
Initially you should seek assistance from an independent financial adviser to ensure that an equity release mortgage is the best solution to pass this money on to your daughter.
The fact that you are releasing equity now could have some positive implications for your inheritance tax liability, but this is also something you should discuss in more detail.
n This week's query was answered by independent financial adviser Ray Boulger, technical manager at John Charcol. Tel: 0800 718191, www.charcolonline.co.uk.
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