Equity Release Explained
What exactly is Equity Release?
The equity or value in your home is its open market value, minus any mortgage or other debt you have secured against it. Equity Release is a way of accessing the cash tied up in your home, without having to move out.
How do I get my money?
You usually receive your money as a cash lump sum, to use as you wish. This varies from plan to plan, and differs depending whether you opt for a plan that provides cash upfront, or an income plan.
Equity Release Key Facts
To qualify for Equity Release, you must be over a certain age. Age limits vary between companies, but for individuals in the UK you must be at least 50 years old
You can get a cash lump sum, regular income, or both, to use as you need
You can continue to live in your own home
You may continue to be responsible for the maintenance of your home
The two main types of Equity Release product are Home Reversion Plans and Lifetime Mortgages.
HOME REVERSION EXPLAINED
What is Home Reversion?
A Home Reversion Plan allows homeowners to release a lump sum from their property, without concerns over future house prices, or the effects of roll up interest.
How does it work?
With a Home Reversion Plan (also known as home income plans) you sell all or part of your property to the plan provider. In return you get a cash lump sum or income. As you are selling your property in exchange for the equity released, the plan provider is taking the risk on future house prices.
Your home, or the part of it you sell, belongs to the buyer or reversion provider, but you are allowed to carry on living in it. This means you will be selling the legal ownership of your home but will be guaranteed the right to live there for as long as you wish, by way of a lifetime lease. In the case of joint applications, this is applicable to both parties, so that both your interests are fully protected.
The complexities of each scheme vary; for example you may be expected to remain liable for repairs to the property, or there may be restrictions that apply.
Your age is a primary factor in determining the allowable percentage released on the survey value of your home. Other factors, such as your gender and the estimated future value of your property, will also be taken into consideration.
Any secured loans or mortgages must be paid off on the sale of your house, so a Home Reversion Plan may be unsuitable for anyone wishing to leave the equity in their property as an inheritance for their next of kin.
Is it right for me?
A Home Reversion Plan can be a useful way of releasing equity from your home, especially if you do not want the stress of moving or downsizing, but you must be sure that it is right for you and suits your particular circumstances and needs.
It is important to remember that with Home Reversion you no longer own your home (even if you only sell part of it). Depending on the particular plan, you may have to maintain the home while you live in it. Youll also be under a secure tenancy, so will have to follow all of the terms of the lease. If you choose a rent-back option, you will have to make regular rent payments.
LIFETIME MORTGAGES EXPLAINED
What are Lifetime Mortgages?
With Lifetime Mortgages, you take out a loan that is secured on your home. There are a number of different kinds of Lifetime Mortgages available:
A Roll-up Lifetime Mortgage
Rolled up means interest is added to the loan over a set period of time, for example, every year. The loan gives you a lump sum or regular income and you are charged a monthly or yearly interest, which is added to the loan. When your home is eventually sold, the amount that you originally borrowed, including the rolled-up interest, is repaid.
A Fixed Repayment Lifetime Mortgage
With this kind of Lifetime Mortgage you get a lump sum, but do not have to pay any interest. Instead of paying interest, when the home is sold, you have to pay the lender a higher amount than you originally borrowed. That amount is agreed in advance with the lender. The lender then uses this higher sum to repay the mortgage when your home is sold.
An Interest-only Lifetime Mortgage
With an interest-only Lifetime Mortgage you get a lump sum upfront and pay a monthly interest on the loan, which can be either fixed or variable. The amount that you originally borrowed is then repaid when your home is sold.
A Home Income Plan
With Home Income Plans the money you borrow is used to buy a regular fixed income for life (also called an annuity). This income is used to pay off the interest on the mortgage and the rest is yours to use as you wish. The amount that you originally borrowed is repaid when your home is sold.
Shared Appreciation Mortgages
Some Lifetime Mortgages include a shared appreciation element. This means that the lender has a share in the value of your home. These kinds of plan are now less popular and less frequently available.
When taking out a Lifetime Mortgage, you can choose to either borrow a lump sum or to opt for a drawdown facility. A drawdown is suitable if you want to release occasional small amounts rather than one big loan upfront, as it means you only pay interest on the money that you actually need at the time.
How does it work?
Like a normal mortgage, you borrow money that is secured against your home. Your home still belongs to you and is not sold as part of the Lifetime Mortgage.
With the exception of roll-up schemes and fixed repayment Lifetime Mortgages, you will have to pay interest on the loan each month. When you die or move out of your home, the property is sold and the money from the sale is used to pay off the loan. Anything left after the loan has been repaid goes to your beneficiaries.
Is it right for me?
This depends on your age and personal circumstances. Lifetime Mortgages can be a flexible way of releasing equity from your home, but you must make sure it suits your particular situation.
There are a number of things to consider:
With a Roll-up Lifetime Mortgage the interest you owe can increase quickly. Eventually this might mean that you owe more than the value of your home, unless you have a no-negative-equity guarantee from the lender.
A Fixed Repayment Lifetime Mortgage is a better deal if you live much longer than the lender thinks you will. But if the home is sold much earlier than you originally planned, you will get a worse deal.
With Interest-only Lifetime Mortgages with variable interest rates, the interest rate may rise faster than your income.
A Home Income Plan only results in a small income after the interest has been paid. These kinds of plan are usually only suitable if you are older.
Remember that you will be expected to ensure that your home is in good condition and remains well maintained. You may need to set aside money to do this when first entering into the plan.
What does it cost?
For both Lifetime Mortgages and Home Reversions, you will have to pay for the following:
An arrangement fee for setting up the plan
Legal fees
Valuation fees
Buildings insurance
With Lifetime Mortgages some of these costs can be added to the loan so you pay less upfront, but you will pay interest on any amounts added to the loan.
Things to think about!
Remember, it is important to be aware of the different products available and the positive and negative points of each type of plan. As with any big decision, you need to explore all the options available to you first. It is recommended that you seek advice before deciding on what route is best for you.
As it is an important decision about your home and your future, it is also recommended that you consult your family if you are considering any Equity Release product.
Remember that Equity Release is not right for everyone. Do yourHomework, seek legal advice, and explore all the options available to you.
Make sure that a particular plan is suited to your own circumstances and needs before you proceed.
The equity or value in your home is its open market value, minus any mortgage or other debt you have secured against it. Equity Release is a way of accessing the cash tied up in your home, without having to move out.
How do I get my money?
You usually receive your money as a cash lump sum, to use as you wish. This varies from plan to plan, and differs depending whether you opt for a plan that provides cash upfront, or an income plan.
Equity Release Key Facts
To qualify for Equity Release, you must be over a certain age. Age limits vary between companies, but for individuals in the UK you must be at least 50 years old
You can get a cash lump sum, regular income, or both, to use as you need
You can continue to live in your own home
You may continue to be responsible for the maintenance of your home
The two main types of Equity Release product are Home Reversion Plans and Lifetime Mortgages.
HOME REVERSION EXPLAINED
What is Home Reversion?
A Home Reversion Plan allows homeowners to release a lump sum from their property, without concerns over future house prices, or the effects of roll up interest.
How does it work?
With a Home Reversion Plan (also known as home income plans) you sell all or part of your property to the plan provider. In return you get a cash lump sum or income. As you are selling your property in exchange for the equity released, the plan provider is taking the risk on future house prices.
Your home, or the part of it you sell, belongs to the buyer or reversion provider, but you are allowed to carry on living in it. This means you will be selling the legal ownership of your home but will be guaranteed the right to live there for as long as you wish, by way of a lifetime lease. In the case of joint applications, this is applicable to both parties, so that both your interests are fully protected.
The complexities of each scheme vary; for example you may be expected to remain liable for repairs to the property, or there may be restrictions that apply.
Your age is a primary factor in determining the allowable percentage released on the survey value of your home. Other factors, such as your gender and the estimated future value of your property, will also be taken into consideration.
Any secured loans or mortgages must be paid off on the sale of your house, so a Home Reversion Plan may be unsuitable for anyone wishing to leave the equity in their property as an inheritance for their next of kin.
Is it right for me?
A Home Reversion Plan can be a useful way of releasing equity from your home, especially if you do not want the stress of moving or downsizing, but you must be sure that it is right for you and suits your particular circumstances and needs.
It is important to remember that with Home Reversion you no longer own your home (even if you only sell part of it). Depending on the particular plan, you may have to maintain the home while you live in it. Youll also be under a secure tenancy, so will have to follow all of the terms of the lease. If you choose a rent-back option, you will have to make regular rent payments.
LIFETIME MORTGAGES EXPLAINED
What are Lifetime Mortgages?
With Lifetime Mortgages, you take out a loan that is secured on your home. There are a number of different kinds of Lifetime Mortgages available:
A Roll-up Lifetime Mortgage
Rolled up means interest is added to the loan over a set period of time, for example, every year. The loan gives you a lump sum or regular income and you are charged a monthly or yearly interest, which is added to the loan. When your home is eventually sold, the amount that you originally borrowed, including the rolled-up interest, is repaid.
A Fixed Repayment Lifetime Mortgage
With this kind of Lifetime Mortgage you get a lump sum, but do not have to pay any interest. Instead of paying interest, when the home is sold, you have to pay the lender a higher amount than you originally borrowed. That amount is agreed in advance with the lender. The lender then uses this higher sum to repay the mortgage when your home is sold.
An Interest-only Lifetime Mortgage
With an interest-only Lifetime Mortgage you get a lump sum upfront and pay a monthly interest on the loan, which can be either fixed or variable. The amount that you originally borrowed is then repaid when your home is sold.
A Home Income Plan
With Home Income Plans the money you borrow is used to buy a regular fixed income for life (also called an annuity). This income is used to pay off the interest on the mortgage and the rest is yours to use as you wish. The amount that you originally borrowed is repaid when your home is sold.
Shared Appreciation Mortgages
Some Lifetime Mortgages include a shared appreciation element. This means that the lender has a share in the value of your home. These kinds of plan are now less popular and less frequently available.
When taking out a Lifetime Mortgage, you can choose to either borrow a lump sum or to opt for a drawdown facility. A drawdown is suitable if you want to release occasional small amounts rather than one big loan upfront, as it means you only pay interest on the money that you actually need at the time.
How does it work?
Like a normal mortgage, you borrow money that is secured against your home. Your home still belongs to you and is not sold as part of the Lifetime Mortgage.
With the exception of roll-up schemes and fixed repayment Lifetime Mortgages, you will have to pay interest on the loan each month. When you die or move out of your home, the property is sold and the money from the sale is used to pay off the loan. Anything left after the loan has been repaid goes to your beneficiaries.
Is it right for me?
This depends on your age and personal circumstances. Lifetime Mortgages can be a flexible way of releasing equity from your home, but you must make sure it suits your particular situation.
There are a number of things to consider:
With a Roll-up Lifetime Mortgage the interest you owe can increase quickly. Eventually this might mean that you owe more than the value of your home, unless you have a no-negative-equity guarantee from the lender.
A Fixed Repayment Lifetime Mortgage is a better deal if you live much longer than the lender thinks you will. But if the home is sold much earlier than you originally planned, you will get a worse deal.
With Interest-only Lifetime Mortgages with variable interest rates, the interest rate may rise faster than your income.
A Home Income Plan only results in a small income after the interest has been paid. These kinds of plan are usually only suitable if you are older.
Remember that you will be expected to ensure that your home is in good condition and remains well maintained. You may need to set aside money to do this when first entering into the plan.
What does it cost?
For both Lifetime Mortgages and Home Reversions, you will have to pay for the following:
An arrangement fee for setting up the plan
Legal fees
Valuation fees
Buildings insurance
With Lifetime Mortgages some of these costs can be added to the loan so you pay less upfront, but you will pay interest on any amounts added to the loan.
Things to think about!
Remember, it is important to be aware of the different products available and the positive and negative points of each type of plan. As with any big decision, you need to explore all the options available to you first. It is recommended that you seek advice before deciding on what route is best for you.
As it is an important decision about your home and your future, it is also recommended that you consult your family if you are considering any Equity Release product.
Remember that Equity Release is not right for everyone. Do yourHomework, seek legal advice, and explore all the options available to you.
Make sure that a particular plan is suited to your own circumstances and needs before you proceed.
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