Equity Release Scheme Explained
Recently Equity Release Schemes have become very popular amongst homeowners who have found themselves to be equity rich but income poor. In other words they have homes that are worth a lot of money but have a little income or money to live on each month. Most homeowners have seen their homes more than double in the last twenty years and believe that it may be worth releasing some money from their homes through an ‘Equity Release Mortgage’. You should contact a mortgage adviser for expert mortgage advice as to whether this type scheme is right for you and your circumstances before pursuing.
There are many equity release schemes available all promising to help you. You really do need to do your homework before committing to a scheme. You should always take expert professional advice before making any commitment. There are two main types of equity release schemes available. The first type is a lifetime mortgage and the second is a Home Reversion. Both Schemes will release a sum of money for you to spend or save and they both allow you to live in your home until you die.
With a lifetime Mortgage you are actually taking out a loan that is secured on your property. You can choose to take a regular income or a cash lump sum at the start. You don’t pay any interest or capital back on the loan as the interest is added to your secured loan each month and when you die the loan is paid off from the sale of your home. The longer you live the more interest is added to the loan and the equity in your home will reduce. You can choose to have a fixed or a variable interest rate applied to your loan. If you took a £45,000 lump-sum and then lived for another 25 years and the interest rate was fixed at 7% then you loan would be £244,235. This would then be subtracted from the sale of the house and the remaining proceeds would then go to your estate.
If you choose a Reversion Scheme then the company you choose would either buy, or arrange for someone else to buy, part or all of your home. You would either receive a lump-sum, an income or a combination of both. It is normal that you would be paid less for your home than the market value as the buyer of your property cannot re-sell your home until you die or you move out possibly into a nursing home. The younger you are when you start this kind of scheme the less money you are able to raise. The buyer of your home will benefit from the rise in the value of your home in the future on the share of your home that they purchased originally.
Beware that there are fees and costs involved in arranging these kinds of schemes, like arrangement fees and legal costs for setting up. It is possible to add these fees to the different schemes as appropriate. In some cases you can move house within the schemes but do check this out before committing yourself.
Should You Consider An Equity Release Mortgage
My thought on whether or not to consider an equity release scheme depends on your circumstances. If you have no family to leave your money to when you die then this is an ideal scheme for you. If however you are considering leaving your family your home when you die then consider selling your home and downsizing. The advantages are that you will release a cash sum of money that you could invest and use the interest to live off whilst maintaining control of the original money and your home.
Your thoughts, experiences and comments are welcome. You can join the discussion below and leave your thoughts and experiences.