In recent times, equity release has become a highly popular scheme in the UK for people 55 years and above who want to tap the value locked up in their homes. It is a method that enables one to have access to part of the value in their house, either as a lump sum payment or a series of installments, without necessarily selling the home or moving out.
But with equity release products being diverse in nature, and so many of them around, how do you ensure you get the one that is right for you or your relatives? In this blog post, we shall examine the various types of equity release schemes offered in the UK, with their pros and cons, and suitability for varying financial purposes.
What Is Equity Release?
Equity release is a product that allows home owners to tap into the value of their property without having to move out or sell it. This is typically achieved using two types of plans:
Lifetime Mortgages: The most popular way of equity release, where you take a lump sum or receive regular payments against the value of your home. The loan and interest on it are repaid when the homeowner passes away or goes into long-term care.
Home Reversion Plans: This is where you sell some or all of your home to a reversion company for a lump sum or monthly payments, but you get to stay in the property for the rest of your life, rent-free.
1. Lifetime Mortgages
How They Work:
A lifetime mortgage enables you to take money out against your property and keep your home, but the interest on the loan accumulates over time and does not have to be repaid until the owner dies or goes into permanent care. There are some plans that give you the ability to make voluntary interest payments in order to lower the amount to pay back later.
No monthly payments needed: You do not have to make regular payments like with conventional mortgages.
You keep the home: You still own the home as long as you occupy it.
Freedom: You can decide whether to pay by lump sum or drawdown (taking smaller amounts over time).
Inheritance: Certain plans enable you to shield part of the estate for beneficiaries under inheritance protection features.
Interest payments: You can make voluntary interest payments, which can minimize the impact on the estate.
Cons:
Interest accrues: In the long term, the compound interest can mean a large sum being repaid.
Lower inheritance: Since the loan is paid back from your home's value, it could lower the inheritance to your family.
Eligibility restrictions: You typically have to be older than 55 to be eligible, and your home has to pass certain requirements.
Best for:
Individuals wanting to remain in their homes but require the ability to draw upon funds for retirement.
Those who do not wish to concern themselves with making monthly payments.
2. Home Reversion Plans
How They Work:
With a reversion home plan, you sell a proportion of your home to a reversion company for a lump sum or an ongoing income. You still live in the property rent-free, and the reversion company owns the proportion of the property they've bought. When you die or move permanently into care, the house is sold, and the reversion company receives their share of the sale money.
Pros:
No debt: You don't have to worry about incurring interest, since the reversion company has bought part of your property for cash.
Lifetime tenancy: You are free to live in your home for life, provided you keep the property in good condition.
No repayments: There are no monthly payments to pay.
Flexible payments: You can take the money as a lump sum or in installments, according to the plan.
Cons:
Less inheritance: What you sell to the reversion company decreases the value of your estate, which may affect what you leave for heirs.
You sell some of your house: If house prices increase, the reversion company may profit more than you would.
Less flexibility: You are no longer the owner of the entire value of your property, which might affect future choices, for example, moving or borrowing additional money.
Lower sum available: Reversion companies usually provide a lower proportion of your home's value than a lifetime mortgage.
Best for:
Individuals who like a single, certain financial deal.
Individuals who are willing to sell a fraction of their house in exchange for a lump sum.
3. Interest-Only Lifetime Mortgages
This type of lifetime mortgage enables the homeowners to pay interest during the term of the loan to avoid the interest accruing and further raising the end debt. It's a more financially sustainable choice than ordinary lifetime mortgages but could need some kind of income to pay the interest. Advantages:
Easy payments: Paying down the interest, the loan balance does not increase as rapidly as it would in a typical lifetime mortgage.
Keep more of your home: Because the principal loan balance doesn't increase as much, more of the value in your home can go to your heirs.
Income constraints: You must have sufficient income to service the interest payments. This can restrict the number of potential applicants.
Risk of interest rate increases: In the event of rising interest rates, your payments will be higher, straining your finances.
Ideal for:
Homeowners who prefer to control their debt and minimize the burden on their estate.
Individuals with enough income to service interest payments.
4. Drawdown Lifetime Mortgages
A drawdown lifetime mortgage enables you to release equity in instalments instead of a lump sum. This can be a useful option for someone who doesn't require a lot of money at the outset but would prefer to release money gradually as needed.
Pros:
Flexibility: You can cash in money when you need it, so you just borrow what you need, which can lower the total amount of interest that is charged.
Smaller loan amounts: Borrowing smaller sums over the years can keep the loan from increasing too rapidly.
Financial security: It can be a stable source of income if you must cover long-term care or other costs.
Cons:
More initial interest: Even though you release less money upfront, the drawdown facility in certain schemes can attract higher interest rates.
Interest on funds not taken: While you haven't borrowed the full amount, interest might be charged on the overall agreed loan amount.
Ideal for:
Homebuyers who require access to funds over a period of time, as opposed to a lump sum.
Individuals who desire flexibility in when and how they can release equity.
Key Points to Consider When Selecting Equity Release
Effect on inheritance: Realize that equity release will lower the value of your estate, which may influence what you can leave behind for beneficiaries.
Eligibility: Every equity release scheme has varied eligibility requirements. Ensure you meet the requirements before signing up for a plan.
Repayment arrangements: Think about how you wish to make repayments. Some schemes enable you to repay interest or voluntarily repay the capital, and others do not.
Charges and fees: Equity release schemes usually involve set-up charges, legal fees, and early repayment penalties. Ensure these are included in your calculations.
Independent advice: It is important to take advice from an adviser who is registered with the Equity Release Council. You should make sure you are fully informed of the risks and advantages before you go ahead.
Final Thoughts
Equity release is a lifeline to many individuals wanting to top up their retirement savings, finance care, or pay for home renovations. Yet, with so many products around, it is imperative to shop around. Though lifetime mortgages are the most popular option, home reversion plans and others present alternative advantages and disadvantages.
Prior to taking a decision, it's best to seek the advice of a financial advisor to make sure you pick the most appropriate plan in light of your situation, financial objectives, and plans for the future. Under proper guidance, equity release can be an effective means to improve your lifestyle without having to sell your home.
