Equity release for care home fees

Equity release is a product that lets homeowners access money that is tied up in their home tax-free. You can release equity either as a lump sum or in smaller amounts over time as you need it. This is known as drawdown or a combination of both.

There are two main options of equity release. You can either do it through a lifetime mortgage (securing a loan against your property) or through a home reversion plan (selling a share of your home).

Regardless of which option you take, you keep the right to continue living in your home.

The money you take out of your home must be repaid to the lender. This usually happens if you move into long-term residential care or after you have died.

As equity release involves securing a loan against your property or selling a share of your home, it should be carefully considered.

It is recommended to get as much advice as possible and consult an independent financial adviser before making a decision as it can become complicated if your circumstances change.

Who is eligible for equity release?

You must be over the age of 55 to be eligible for equity release and there may be an upper age limit depending on the lender. If you are considering a home reversion plan, a minimum age of 60 or 65 may apply.

The property you own must be your main residence and be located in the UK. There may be requirements relating to the condition of your property, its value and what type of property it is.

You must usually own your home outright. If you still have a mortgage, you will have to pay off any outstanding amounts at the same time as releasing equity.

If you are in a couple and you both have equity in the property, you must both meet the age requirements.

Lifetime mortgage – securing a loan against your property

Equity release through a lifetime mortgage means that you are loaned either a lump sum or smaller amounts as you need them against the value of your home. You retain the right to live in your home until you pass away, or you need to move into long-term care.

The higher the value of your home is and the older you are, the more money you will be able to release. Typically, you will be able to borrow up to 60 percent of the value of your home.

In general, you will not have to make any repayments to the lender while you are alive. Instead, interest ‘rolls up’ and is added to the loan over time until your home is sold. In some cases, you may be able to make monthly repayments.

It is important to note that lenders may require you to pay the loan back if you move into a care home or other type of residential care permanently.

Most lifetime mortgage schemes add all interest to the lump sum at the end, which means the total value of your debt can increase substantially. In the same vein, the younger you are when you first release equity, the more it will likely cost.

However, the interest rate must be fixed or have a fixed upper limit if it is variable.

Home reversion – sell a share or all of your home

A home reversion scheme type of equity release means that you sell either a share or all of your home to a home reversion provider in return for regular payments or a lump sum.

This means you will lose sole ownership of your home, but you will still retain the right to live there until you pass away or move into residential care.

Your debt will not have to be repayable until the property is sold. The proceeds of the sale will be shared according to how much property the home-reversion company owns, meaning you or your beneficiaries will not get the full proceeds from the sale.

Can you use equity release to pay for care home fees?

Equity release agreements require you to repay the full loan if you move into long-term residential care. This means the scheme may not be suitable if you think that you might have to move into a care home.

Local authorities in the UK will contribute towards your care home fees if you have capital below a certain amount. Their calculation will include assets, such as your property unless it is occupied by someone who meets the criteria to have your property excluded.

This means that if the majority of your capital is tied up in your home and takes you over the threshold, you may be tempted to use equity release and give the money away to come under the upper limit and avoid paying for care home fees.

However, your local authority may consider this deliberate deprivation of assets to avoid paying for care home fees, which means you may have to pay for everything yourself even if your capital is now below the threshold.