What are equity release schemes?

Equity release is a product that allows you to easily release “equity” or profit in your current home without selling it by providing you with a tax free lump sum. The money that is released from your home can be used as you wish whether for that holiday of a lifetime or simply to live a more comfortable lifestyle.

mortgage-equityWhat is equity?

In basic terms, equity is the difference between the market value of your home less any loans secured on it. So for example, if you have a home valued at £100,000 and you have outstanding loans secured against the property  (mortgages, second charge loans, secured loans for example) of £20,000, then you have £80,000 equity available.

There are no repayments to be made and you can stay in your home until you die or move in to a care home.

Now before you run out and apply for an equity release, this product is not available for everyone. To qualify for an equity release you:

•    Must be over 55 years old
•    Live in the UK or Northern Ireland
•    Have a home worth at least £70,000.

When you apply for an equity release, you should note that some schemes also look at your health.

How much can I get?

Generally equity releases can provide between 20% and 50% of the property value as a lump sum payment. The amount depends on how much equity there is in your home and the age of the youngest homeowner.

You can use an equity release calculator to get an idea of how much money you may be able to release.

There are two main types of equity release in the UK

Lifetime Mortgage

With a lifetime mortgage you borrow a sum of money against the equity in your home but still retain home ownership.  There are advantages and disadvantages to this type of product.   The main advantage is you will still own your home and benefit from any property value increase.

The disadvantage is the debt will grow as interest is applied and it reduces the value of your estate.

Home Reversion Plan

A home reversion plan is different in that you sell a percentage of your home to the lender in return for a lump sum payment.  In this way, you then jointly own your home so you don’t own it outright anymore.  A home reversion advantage is that is provides a tax free lump sum with no interest payments and you will be able to stay in your home for the rest of your life.

A major disadvantage is that a reversion plan company could own a large portion or all of your home.  This will reduce the value of your estate.

Costs

Regardless of the type of release scheme you choose, there will be fees to be paid, but only once you have applied and drawndown the cash sum. These fees vary depending on the equity release scheme used and will include advice charges, application fees, and property valuation and legal fees. Talk to your adviser about the different fees and costs before choosing your product.

Summary

While on the surface, an equity release looks like a simple product and could be quite tempting for some, it is worthwhile taking the time to research options and discuss them with an adviser.

Equity release schemes will need to be handled with advice so make sure you choose an adviser that offers you the protection of being regulated by the FCA (Financial Conduct Authority).

In the UK, currently nearly all of the equity release plans are lifetime mortgages, as most people will understand the concept of mortgages and also want to retain ownership of their property.