Using an equity release scheme to fund live-in care

Paying for care is a considerable long-term commitment, so if your loved one is considering long-term care in their own home, an equity release scheme could provide the necessary funds. However, it’s of vital importance that you seek out expert advice before going ahead.

Make sure that you speak to a suitably qualified independent financial advisor with a CF8 qualification, which is specifically concerned with care costs, before proceeding with equity release, to make sure that your loved one isn’t financially compromised by any arrangements put in place.

What is equity release?

Equity release allows your loved one to access money tied up in their property, and it can be a good option for any older person who owns their own home and is planning to arrange live-in home care. There are a variety of schemes on offer that can provide a lump sum, or regular payments, in the form of a loan set against the value of the property.

However, it is vitally important to do your homework to establish that this is the best solution for your loved one, so don’t be tempted to rush into anything. Take time and make sure that you are in possession of all the facts before making a decision.

Is equity release right for my loved one?

If your elderly relative plans to arrange long-term care in their own home, then equity release can be the most effective way of accessing the funds tied up in the value of their home, in order to fund that care. It may not be necessary if they qualify for local authority assistance, so be sure to arrange for an assessment from their social services department beforehand, to establish what help might be available.

If you suspect that your loved one will need to move into residential care eventually, then equity release may not be the most appropriate solution. Once they have moved out of their home, they will be expected to repay the loan in full, which may negate any initial benefits.

It’s important to sit down with your elderly relative and spend time discussing the implications of equity release, together with their expectations of their care needs. Elderly care provisions may continue for many years, and your loved one needs to be aware of the cost implications of providing companion care or possibly dementia care, as time goes on.

There are a variety of equity release schemes available, including lifetime mortgages and home reversion plans, so take the time to establish the most suitable one for your loved one’s circumstances.

Lifetime mortgage

A lifetime mortgage provides your loved one with a loan, which is secured on their property. The mortgage term lasts until your loved one dies, moves into residential care or sells the property, at which point the loan must be repaid in full.

An interest roll-up mortgage offers your loved one either a lump sum or regular payments that can be used to fund elderly care in the home. Any interest is added to the loan’s total, which is only repaid once the property is sold at the end of the mortgage term.

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Another option is an interest-paying mortgage, in which your loved one receives a loan which they make payments towards, to reduce the amount of interest added to the total. As with the interest roll-up option, the loan is repaid in full once the property is sold.

The third option is to arrange a fixed-repayment mortgage. There is no interest to pay: instead, you agree an amount higher than the value of your loan, which must be repaid when the property is sold.

The lender will try to work out how long your relative will remain in the property to establish the value of the loan. If your relative lives longer than the assessment they will benefit financially, but if they live for less time than expected, the estate could see a fall in value.

Once the property is sold, the lender takes what is owed, with anything left over from the sale going into your loved one’s estate. However, if the sale fails to cover the cost of the loan, your loved one’s beneficiaries could have to make up any shortfall. For this reason, it’s important to make sure that the loan contract includes a ‘no negative equity’ guarantee, as this can save heartache and unexpected costs in the future.

Home reversion plan

A home reversion plan allows your loved one to sell their home or just a proportion of it. They remain in the property rent-free for the rest of their lives, or until they choose to move out. It’s possible to sell percentages of the home over a period of time if this is more convenient, but however home reversion is done, the amount of money raised is always less than the property’s value on the open market.

Sale-and-rent-back scheme

Another option, although one that carries a degree of risk, is to sell the property for less than market value, and then to rent it back for a fixed length of time. This is an option often chosen by elderly people who have debts, or outstanding mortgage payments. However, there is no guarantee of a home for life, and your loved one could even face eviction under some circumstances.

If you feel that this is the only option available to your loved one under their circumstances, be sure to organise the scheme through a company which is under the jurisdiction of the Financial Conduct Authority, for greater peace of mind.