What is Equity Release?
Equity release schemes are growing in popularity every year and many homeowners look to equity release to help them secure the lifestyle they want during their retirement years. Before you invest in any financial product or scheme, you should ensure that you gather and understand as much information as possible. This applies to equity release schemes as well. Knowing both the advantages and disadvantages can help you make the most reliable and educated decision for your particular circumstance.
How Does Equity Release Work?
An equity release scheme is a way for you to tap into the equity that you have built up in your home and use that cash to provide for your retirement lifestyle. This cash can be paid via a one-time lump sum or could be paid out as supplemental income. There are a variety of different equity release schemes available and each of them provides a different level of flexibility, as well as different features and enhancements. For the most part, equity release schemes are only used during retirement and you can typically become eligible for a scheme at the age of 55.
Through equity release, you can receive cash for the equity built up in your home but you are still able to remain living in the property, either until you pass away or your move into permanent long term care. If you live with a spouse or partner, it is typically not until after the last homeowner has passed away or moved that the house needs to be sold. Once the house is ready to be sold, your beneficiaries sell the property and return the appropriate sum of money back to your equity release lender. If there is a remaining balance after the debt is paid, it can be sent on to your estate and distribution in accordance with the Last Will & Testament of the deceased.
Kinds of Equity Release Schemes
There are a couple of different kinds of equity release schemes and within each category there are even more ways to individualize your scheme. The two main kinds of equity release schemes are home reversions and lifetime mortgages.
• Lifetime Mortgage. This is by far the more popular option when it comes to equity release schemes. There are a number of ways to tailor these plans to suit your needs. For example, with a lifetime mortgage, you would release the equity from your home and still be able to live there. However, the flexibility of these plans allows you to choose how you want to repay the debt. So for example, you may want to make interest payments as the interest accrues on your loan. There are options for different repayment structures with a lifetime mortgage. With these plans, you are also able to maintain total ownership of your property. Some of the more common of the different types of lifetime mortgages include the drawdown lifetime mortgage, roll-up lifetime mortgage, and the interest-only lifetime mortgage.
• Home reversion. The home reversion type of equity release is far less popular than the lifetime mortgage. In fact, it only accounts for about 2% of all equity release schemes. With this plan, you have to sell your home, in whole or in part, in exchange for your payment. This payment could be received in one larger lump sum or could be spread out as income over time. You could also choose a hybrid of the two options and receive a larger payment and then subsequent smaller payments. With a home reversion, you are essentially a tenant in your home but you do not have to pay rent. You do not retain full ownership of the property since you are required to actually transfer all or part of it with this scheme to the home reversion provider.
There are many advantages to an equity release scheme:
1. Retain 100% ownership. Lifetime mortgage schemes allow you to release equity from your property and still maintain 100% ownership.
2. No negative equity guarantee. This means that if your home is sold for a reasonable value and is not enough to pay off your debt, your estate will not be left with any outstanding balance.
3. Repayment options. Choose whether to make monthly payments, or not.
4. Permanent Residence. With equity release schemes, you can stay living in your home and do not have to move. Your home will not be sold until you either pass away or move into long term care.
Similar to any other financial product, there are some disadvantages to using an equity release scheme and this particular product might not work best for everyone:
1. Impacts Benefits that are Means Tested. Because you are given a rather large lump sum with an equity release scheme, you can expect to have your increased assets impact your ability to receive any services that are means tested.
2. Inheritance Reduction. If you invest in an equity release scheme, you may be limiting how much you can leave behind to your beneficiaries, especially if you choose a scheme where you do not make any regular interest payments.
3. Repayment Charges. If you want to pay off your equity release scheme early, you may be faced with early repayment fees of upto 25% of the original amount borrowed.
As with any financial decision, always seek independent equity release advice. This will ensure that research is undertaken from the whole of the marketplace and the best equity release scheme advised.
Making the correct decision based on circumstances now & in the future can make a significant difference to the ultimate inheritance pay-out. Your equity release adviser should be fully regulated by the FCA & ideally a member of the Equity Release Council.
If you are unsure on your best route to market, please feel free to contact EquityReleases.com on 0800 678 5159 today for impartial equity release advice.