Equity release – the good, the bad and the ugly

….and why isn’t is available to Isle of Man homeowners?

A special Business365 report

For many people the prospect of life after retirement is both exciting and frightening. They may look forward to having the freedom to live their lives as they choose, away from the daily grind of work, but there may also be serious concerns over how little money they will have to live on.

For homeowners there are ways of releasing cash; some might consider downsizing, though the costs of estate agents fees and legal costs including conveyancing, can significantly reduce the size of the cash pot at the end of the process.

Others (particularly those without children) may be attracted to Equity Release schemes  – though if they live on the Isle of Man, they may well be disappointed to learn that such an option isn’t readily available here. 

In recent times companies offering equity release have stepped up their advertising campaigns on TV and in magazines and newspapers. Images of a friendly salesman rocking up on somebody’s doorstep and sealing the deal over a nice cup of tea, before departing with a friendly wave, abound; you would be forgiven for thinking that signing on the dotted line was a complete ‘no brainer’.

There are two types of scheme available in the UK, though neither offer no strings access to the proverbial money tree, as the marketing campaigns might imply.

So how do the schemes actually work? One involves the equity release company arranging for your property to be bought by a private investor. Under the terms of the deal the investor commits to providing you with a lifetime lease to remain in the property, and gives you a lump sum. Sounds great eh? Remember there’s no such thing as a free lunch, and in this case the lump you receive will be considerably smaller than the prevailing market value of the lump sold. But, if you are comfortable with that, then happy days.

The other type of equity release scheme, which is more commonly offered, is where mature homeowners are provided with a lifetime mortgage on their home. Under the terms of the arrangement interest payments are rolled up monthly and added to the outstanding balance. The rising debt is eventually settled when the property is sold after you die or move into long-term care. The amount you can borrow is usually between 18 per cent and 50 per cent of the property’s total value. The older you are, the more you can release, based on your reduced life expectancy.

Most providers, though not all, now offer a ‘no-negative-equity guarantee’, which means the debt will never exceed the sale value of the property. Be aware though that this could still mean that all the property’s value is used up in paying off the mortgage.

Before you grab the phone to see what you could gain from such a scheme, hold on. It’s our understanding at Business365 that there are currently no businesses offering equity release to Isle of Man homeowners. The last company to do so closed its local operation a couple of years ago.

So why aren’t companies offering equity release schemes on the Island? Well, it boils down to differences between the Isle of Man and the UK in terms of our tax regimes and our property ownership regulations. 

So, in a nutshell, if your home has increased in value over the years, equity release enables you to access some of that money to supplement your retirement income – instead of leaving it all to your children, or to cover your long-term care.

The main pitfall is that it doesn’t offer you the full market value of your property. You would invariably achieve a much bigger sum from selling the propertyon the open market – but the catch 22 is that you would then need to find somewhere else to live.

If you are keen to leave an inheritance to your children and your home is your main asset then they may be disappointed. 

For all their potential pitfalls Equity Release schemes do have their benefits in some circumstances, and can be a useful way of releasing cash for older homeowners to offer them a secure standard of living for the rest of their lives.

In the current economic climate it’s unfortunate that Isle of Man residents are denied the option. Maybe this is something for our politicians need to look into?

Our advice is to always seek professional advice before deciding on a particular course of action.