Equity release schemes are a way for older homeowners to free up some of the cash value of their property. However, there are a number of different types of plan available, and they can vary quite significantly in how they work, so it’s important to do some research before committing yourself. Here’s a simple guide to the main types of equity release currently available.
Lifetime mortgages are the most common type of equity release currently available. You take out a loan secured against your home, and you can continue living in the property until you die or move into long-term care. There are no monthly payments to make from your day to day finances – although some schemes do include the facility to repay the interest to avoid it building up. When the property is sold or earlier if finances allow, the amount borrowed and all accrued interest is repaid to the lender.
There are a variety of types of lifetime mortgage available, which means you can choose the type of scheme that best suits your needs. Drawdown lifetime mortgages, for example, allow you to draw money in stages as you need it, rather than as a single lump sum. The advantage of this is that you are only charged interest from the time that you actually draw on the funds.
The main disadvantage with lifetime mortgages is that a large amount of interest can accumulate quickly, swallowing up the equity in your home. Fortunately, lifetime mortgages come with a “no negative equity guarantee” which means that you will never owe more than the value of your property. With some products, it’s also possible to protect or ring-fence either a percentage share of the property or a set monetary value, for inheritance or some other later use.
Home reversion plans
With a home reversion plan, you sell a share of up to 100% of your home to the plan provider in return for either a tax-free lump sum or regular income. You can remain in your home without having to make any rent payments to the plan provider, who is repaid their share of the property value on its sale, when the owner either dies or moves into long-term residential care.
One advantage of home reversion is that if you sell only part of your home to the plan provider, you always retain ownership of the same percentage share of your property throughout the lifetime of the plan, providing you do not sell further shares. This means you can know that the beneficiaries of your will shall receive an inheritance on the sale of the property.
You should be aware that the tax-free sum you can release by taking out a home reversion plan will always be calculated at a value less than the actual current value of your home. This is because the company potentially will not get a return on its investment for years, or even decades. It’s therefore important to consider carefully whether you want to sell a portion of your property for below market value.
Other types of equity release
Changes to how certain types of equity release are regulated mean that there is now a wider range of products available on the market than ever before, meaning greater choice for the consumer. One type that has grown in popularity recently is the retirement interest-only mortgage. In many ways this is similar to a standard interest-only mortgage: you borrow a lump sum, and make monthly repayments to cover the accruing interest. Because you’re repaying the interest month by month, the amount you owe always remains the same.
While standard mortgages have an agreed term, at the end of which the loan must be repaid, with a retirement interest-only mortgage you can remain in your home until you die or move into residential care, and the loan is repaid from the proceeds of the sale of the property.
Retirement interest-only mortgages and similar products can, for some, be a positive and potentially less expensive alternative to other types of equity release, but it’s important to be sure that you will be able to afford the interest repayments on an ongoing basis – like any other mortgage, missed payments or arrears could result in the lender repossessing the property.
How Premier Equity Release can help
Whatever your financial situation, there is a range of equity release options to choose from. The market can be complicated, and the available plans and amount you can borrow can also be dependent upon factors such as age and health. At Premier Equity Release, we have qualified advisers experienced in helping people find the equity release solution that’s right for them. Get in touch with us today to discuss how we can help you.