Equity release schemes have proven to be increasingly popular in recent times. So what do equity release schemes actually do? How do they work? And what are the different type of equity release schemes available today?
Equity release is essentially a way to tap into the value built in your property without having to sell the house and move out. It allows home owning retirees to access the equity in their home in the form of usable cash. Whether it is for a one off expense such as a home improvement project, or a holiday, or to supplement your monthly income, equity release can be a flexible tool that allows you to optimise the value of your home.
There are two main types of equity release schemes – home reversion plans and lifetime mortgages. A lifetime mortgage is a mortgage with no fixed term, that only ends upon death or when you move into permanent long term care. There are different types of lifetime mortgages, and they differ from each other in the way they work, as well as in their eligibility criteria.
A lifetime mortgage is essentially loan. The loan is repaid when the house is sold, which is done only when the term of the mortgage ends. The interest on the mortgage is either repaid every month in part or full, or rolled up and added to the principle amount. Lifetime mortgages in which only the interest is repaid every month, are known as interest only lifetime mortgages, such as More2Life’s Interest Choice Plan or Stonehaven’s Interest Select Plans.
Interest only lifetime mortgages can be suitable for people who want to release some equity and can afford to make monthly interest payments. In fact, many people still disappointedly still searching for the Halifax Retirement home Plan have found these two interest only lifetime mortgage schemes as life savers due to Halifax no longer lending on their retirement home plan. By making regular and full monthly interest payments, you have the option of keeping the end balance owed level and knowing exactly how much of your equity will go to the lender when the mortgage ends. This is great news if you want to protect your children’s inheritance.
Roll up equity release schemes are where the equity can be released as a lump sum or by future withdrawals, and no monthly repayments need to be made to the lender. The interest is rolled up into the loan amount, and so the interest is compounded each month or year depending on the lender. The final amount owed is only repaid when the term ends and the property is sold. Roll up equity release can be a suitable option for those who need to access the equity in their home, and do not wish to make any monthly repayments. They usually are not as concerned about how much equity remains at the end of the day.
Equity release lifetime mortgages also differ in the way the money can be released. It can either be released as a lump sum, as monthly payments, as a combination of both, or as and when you need it. Lifetime mortgages that allow you to release a lump sum and make further releases as and when you should need them are known as drawdown lifetime mortgage schemes.
The second main type of equity release schemes is home reversion plans. Home reversion, unlike a mortgage, involves selling a proportion of the property to the equity release provider. The amount you release is in effect the payment for the portion of the property sold. The provider recovers this amount when the property is sold, which is upon death or when you move into permanent care.
Although it involves selling a portion of the house, this has no impact on your right to continue living in your home. You retain the right to live in your property, rent free, for as long as you live or until you move into permanent care. This is achieved by the implementation of a lifetime tenancy agreement. When the property is sold, the provider gets their fair share of the sale value of the home, depending on the percentage of the home that was sold when the plan started.
Lifetime mortgages and home reversion are the two main types of equity release schemes. There are a number of equity release providers offering plans within these two sections and a simple search on any good comparison site can help you find them. Many comparison sites also offer online equity release calculators that can help you understand how much you can borrow with each plan, as well as the terms of lending for each plan.
For a quote on a lifetime mortgage or home reversion call 0800 028 3142 and speak to one of our specialists.