Equity Release Schemes: The Current Situation

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Age-net Explores Equity Release Schemes

If you have lots of assets, but not a lot of money to your name, equity release could come in very handy. It is a way in which you can access a percentage of the value of your home without the need to move to a new property. You can then have the choice of what you spend the money on. It could come in useful for a whole host of different reasons, including supplementing the income you get from your pension to increase your quality of life, taking the dream holiday you have always wanted, to help your children or grandchildren finance their education or to buy their first home, to pay off any debts you may have from other sources or to benefit from watching your family enjoying their inheritance money whilst you are still around to enjoy it with them.You are essentially borrowing this money with the guarantee that the eventual sale of your property will give you the money to pay it back. It is not an easy way of getting ‘no strings attached’ cash, but it is an easy way of getting a loan should you need or want it for any reason.

No need to move

When in need of significant amounts of money, people seem to think that their only viable option is to sell their home and buy a smaller property to release the money they need. With equity release there is no need to do this, you can carry on living in the house that no doubt you worked hard to buy and still benefit from an injection of tax-free cash. This is great because it saves the time, hassle and financial costs associated with moving home.

How to pay the money back

You should consider all of your options carefully before deciding to release equity tied up in your home because it is a long term commitment. You can either decide to make monthly repayments, at an amount that you will be able to afford well into the future, or you can choose to have the repayments made when you die or move into a long term care plan. The money will then be generated by the sale of your house.

Types of equity release schemes

There are two main types of equity release schemes for you to choose from: lifetime mortgages and home reversion plans. There is usually a minimum age set for both of these schemes, which is typically set at 55 for lifetime mortgages and 60 for home reversion schemes.

Lifetime Mortgages

These are the most common form of equity release scheme. These will let you to take out a loan against your home and receive in return either a cash lump sum or a steady income over a number of years. You will still own your property and have all the same rights regarding land and access. The owner won’t have to worry about making any repayments on the loan, as these will be settled only upon death or permanent movement into a care home when the property can be sold to release the money. As there are no repayments, the interest is accumulated and is then added onto the total amount owed in one go when it is to be paid back. This can be dangerous as the longer you continue to live in the same property, the more you will owe as there is no way of stopping the interest from building up except to pay the amount off in full.

Think very carefully before taking out one of these schemes as your relatives could end up paying back an amount twice or three times the amount you borrowed when they have to sell your property. However, you should tend to find that equity release products now come with what is known as a ‘no negative equity guarantee’. Make sure any product you are interested in includes this for your own peace of mind.

There is a slightly different option, which is called a ‘drawdown’ lifetime mortgage. This will allow you to release a certain amount of money into a separate ‘pot’. You can then draw from this pot as and when you like, and the interest will only be added to the money that you withdraw. This could save you a lot of money in interest payments but is not at all useful if you need the money as a lump sum.

Home Reversion Schemes

These are far less common and make up a very small section of the equity release market. They involve you actually selling your home, or a part of it, to a company who in return grant you the right to carry on living there. When your house is then sold, you or your family will only be given the money which corresponds to the proportion of the house that you still own. So if you have sold half of the property to a home reversion scheme to release equity, you will only receive half of the value of the property when it is sold. These schemes are less likely to accumulate huge amounts of interest, but there are often hefty fees payable to the companies to cover all of the legal costs associated with changing ownership. If the house increases in value over the years that you own only part of it, then you will of course be losing out in the long run.

Is it safe to sign up to an equity release scheme?

This really is the $64,000 question. All companies offering equity release programmes are regulated and monitored by the Financial Services Authority. This means that they are unable to do anything illegal and won’t be able to take your money or property without giving you something in return. Make sure that the company you are using is properly accredited and you shouldn’t encounter any problems.

It is worth noting that equity release schemes are not designed to be the most efficient or the cheapest way to borrow money. They are designed for older borrowers who are less likely to be successful in being given a second mortgage or a different type of loan due to having a lower income and having less time to pay it back.

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