Equity release; understanding the implications and why a capacity assessment may be required before proceeding. 

What is equity release?

Equity release is a product offered by a company that enables homeowners to access funds from their property. This can be used to finance home improvements, such as a new bathroom or kitchen, or to provide financial support for a loved one. It can also be used to increase pension income. Equity release is a specific type of borrowing that allows individuals aged 55 and over to access cash for their lifetime.

The two types of equity release available are:

A Lifetime mortgage – A long-term loan against property, with eligibility starting from the age of 55. Typically, a lump sum is borrowed with no monthly repayments, but interest accrues on the loan amount. The loan is repaid upon the sale of the property, for example, upon your death or if you enter into 24-hour care. 

Eligibility for a lifetime mortgage UK:

• Be aged 55 or over (applicable to each homeowner)
• Own your property in the UK
• Your property is valued at £75,000 or more
• With a minimum borrowing limit of £15,000

A Home revision Plan – This is where you sell all or part of your home to the provider at a below-market value, receiving a tax-free lump sum in return or a monthly income if you prefer this option. 

The implications, advantages and disadvantages of an equity release on your home:

Your equity release financial advisor will talk you through some of the pros and cons of your specific chosen product, which could include;

Pros:

• You will retain ownership of your home.
• Some lenders will tailor their interest rates to your individual circumstances.
• You can set aside funds in the property for inheritance purposes.
• Some lifetime mortgages can be transferred with you if you sell and purchase a new property.
• You have the flexibility to choose a lump sum or a monthly payment. 

Cons:

• Equity release will directly affect any inheritance due, such as that intended for your children.
• Equity release can have tax implications, and it is important you understand these before proceeding.
• By completing an equity release this may affect certain benefits such as Council Tax support and Pension Credit.
• Equity release is a significant decision and commitment.
• You may be paying a high level of interest on your loan, which can rapidly accrue.

What is the legal framework used in the assessment of equity release capacity, and why might an assessment be required?

The legal framework for assessing equity release is governed by The Mental Capacity Act 2005. As mental capacity assessors, we must be satisfied that the individual is able to understand, retain, use, weigh and communicate an understanding of the matter in hand. 

Many people aged 55 and over are living in properties with equity tied up within them and seek to obtain an equity release as a tax-free way to draw down on their equity and spend it as they wish in their lifetime. If a property is jointly owned, both named homeowners would need to agree to the equity release proposal in order to enter into the agreement.

An equity release capacity assessment may be required to demonstrate your understanding and capacity at the time of signing and entering into the equity release agreement. This may arise from an early or established diagnosis of a cognitive impairment or from the lender’s concerns regarding your understanding of the proposed agreement. Alternatively, it may be a precautionary measure to address potential questions from your network, such as your children. 

It is important to note that a formal diagnosis of dementia does not immediately indicate a lack of capacity with regard to the matter in hand. At Thornton & Lee, our assessors have considerable knowledge and experience in assessing individuals at various stages of their dementia journey. They use a range of tools and approaches to support your understanding and engagement with key information, ensuring to maximise your comprehension and communication. They are also individually highly skilled in complex and alternative communication and will strive to support you in conveying your understanding, views and wishes. 

Equity release where the joint or single homeowner has lost mental capacity

If the person living in their home lacks the mental capacity to make the decision regarding the proposed equity release, it can still be progressed (subject to the lender’s criteria) and agreed upon if a registered Lasting Power of Attorney (LPA), Enduring Power of Attorney (EPA) or Deputyship for property and affairs Order is in place. The latter may require a further application to the Court of Protection if not included in the original Order made to the Court of Protection.

The suitability of the equity release must be evidenced to be in the person’s best interest, such as paying for ongoing home care fees or adaptations in the home, and not be perceived as a potential deprivation of assets. If the Attorney may benefit from the equity release, they must also make an application to the Court of Protection alongside a formal capacity assessment to provide evidence why the proposal should be granted (completed on a COP3 form). 

How Thornton & Lee can support you and your lender

We understand that deciding to proceed with an equity release is a significant financial decision which can affect not only you but also your children. To ensure a robust, structured and evidence-based assessment, we ensure that all necessary pre-assessment checks have been completed and relevant information received. Including the loan document, product information and its terms and implications. This ensures the assessor can verify and support your understanding of the product’s key terms. 

Essentially, that the decision has been made free of influence, and you have considered the long-term implications of the loan. At Thornton & Lee, we take the time to understand the requirements of your lender and the key points required to ensure the assessment is conducive to your specific needs. Our assessors have extensive experience and robust knowledge of equity release and the key information required to produce a Court standard report. 

To find out how Thornton & Lee can support you with an equity release capacity assessment or an assessment for a loved one, please contact our friendly team today or complete one of our referral forms. A member of our team will then be in touch to discuss and support you through the process.