What is Equity Release?

Equity release is a scheme by which homeowners can raise money against the value of their property. The money can either be given as a lump sum amount or paid in fixed installments, or a combination of both. The right to the property still remains with the homeowner and their partner, and continues to do so until their deaths, or until they decide to move into a home or to a relative’s house. There are no repayments required, and the lender realises the loan amount and interest by the eventual sale of the property.

To qualify for equity release you should:

  • Own a property that is worth £50,000 or more
  • Be a resident of the UK or Northern Ireland
  • You and your partner should be  in the age group  55 to 95

Main Features of Equity Release

  • Depending on the type of scheme, you can receive monthly payments or a lump sum amount.
  • Apart from the range of schemes presently available, a scheme can also be customised to individual requirements.
  • There is no restriction on how you spend the money you receive.
  • Right to stay in the house against which you have taken this scheme, for the rest of your life, or until you choose to move out.
  • Usually no repayments are required.
  • When you take this scheme, your estate value is reduced.
  • The scheme may  affect you getting certain state benefits.

Main Advantages of Equity Release

The equity of your home is equal to its value, minus any mortgage that is outstanding. This amount can be  quite large, and the scheme provides a way to unlock part of this amount, and put it to use, especially during a time in your life when you need it the most. The tax-free lump sum, or the additional income you receive can be used by you to make important purchases, improve your comforts, or help other family members. This is the easiest way of raising money without giving up any of your assets.

Types of Equity Release Schemes

Currently there are five types of equity release schemes. Each type has its set of advantages and disadvantages, and your choice will mainly depend on your individual circumstances and requirements. However, it is recommended that you take a scheme that is approved by SHIP (Safe Home Income Plans). This will guarantee your right to remain in your home for life, ability to move to another property without incurring any penalty, and the amount you owe will not overshoot your home’s value. Here is a brief description of each type of equity release scheme, so that you can take an informed decision.

1) Lifetime Mortgages

This is the most popular scheme, where you take a loan against you home value, and receive a lump sum amount. Although no repayments are necessary, you have the option of repaying the loan. The accrued interest and the principal loan amount gets repaid by the sale of your property after you and your partner are no more, or have moved out from your home, to stay in a care facility.

2) Drawdown Lifetime Mortgages

This is almost the same as a lifetime mortgage, the only difference being the ability to draw cash whenever you need, instead of receiving a lump sum amount. Interest is accrued, only on the drawn amount, and is repaid with the principal to the scheme provider, when the property is sold. All other conditions remain the same as lifetime mortgages. This type allows you to save quite a bit on the interest, and you can leave behind a bigger estate.

3) Home Reversion Plans

In this scheme, you sell all, or part of your property, to the scheme provider. In exchange, you get a lump sum amount and a lease for lifetime that allows you and your partner to stay on your property until death. The percentage of your property, not sold to the provider, can be left as inheritance. These types of plans allow you to raise much more money, compared to lifetime mortgages schemes, as you are actually selling your property. However, the amount will still be discounted compared to an actual sale, as you are getting a lifetime lease, at zero cost. On the downside, you cannot benefit from any future rise in your home value, on the percentage you have sold.

4) Interest-only Lifetime Mortgages

This is same as lifetime mortgage, but here you pay off the interest accrued on a monthly basis. The will reduce the amount that has to be paid back to the scheme provider.

5) Enhanced Lifetime Mortgages

In this type of equity release, you can get more money released from the equity of your home. The extra will depend on your health condition, and choice of lifestyle.

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