Basic Understanding of Equity Release Schemes

The term equity release is used to refer to raising money in the way of capital or income against the value of a property. An equity release scheme enables a homeowner, mostly those aged between 55-95 who have paid off their mortgage or have just a very small amount left to pay, to exchange value in their home for tax free cash or income, without the option of repayment. There are basically three types of equity release schemes: lifetime mortgage, home reversion plans and drawdown lifetime mortgage. Usually, the UK property must be of standard construction e.g., brick or stone and have a minimum valuation of £60,000. To understand this fully, learn about compound interest calculator tools. The calculator helps you with the cost.

For those who qualify for equity release schemes, and are interested, then the first step to take is to calculate just how much capital you can release from your home, before deciding which of the schemes will suit you most. These calculations usually involve the use of a compound interest calculator to determine just how much your home can generate for you as income. You are however advised to seek the help of an expert, an equity release adviser to help you review your options and determine which scheme is best for you. The adviser will also help you with your calculations to this effect.

Your adviser will help you survey the market to search for the best option for you and return with feedback that he will discuss with you before you eventually make up your mind on which scheme to adopt and then proceed with the rest of the process. This person should provide a Key Facts Illustration which is usually a ten page document explaining the ’ins and outs’ of the recommended scheme such as the costs, charges and the rolled up balance in the future years.

Advantages of equity release schemes include the fact that it will provide you with capital or income without you having to work for it, no repayment is required from you until your house is sold, and, depending on the stipulations of your scheme, you can still move houses if you want to.

The disadvantages however are that the equity value of your property will continue to decrease, assuming the property value does not increase. This can create an issue of inheritance. If you use all the equity in your home or it becomes smaller you may find that your children have nothing left when you pass on. This is because the lifetime mortgage might exceed the housing value due to the compounding interest.

You are protected from negative equity as long as you choose the right provider. Most providers under the Safe Home Income Plan or SHIP offer a negative equity clause. It stipulates that you and your family do not owe more than the value in your home. It does not stipulate that a certain percentage must be left for your beneficiaries. More Info can be found here.

Given that you understand the benefits and disadvantages it is time to look at the products mentioned above:

Home Reversion

This is not a loan. It is a sale of your home all or in part. You gain money from selling your home, but you also get to remain in your home with the lifetime tenancy agreement. This agreement promises rent free lifetime rental of your home no matter the portion you sell. If you do not sell the home in full, you guarantee your beneficiaries an inheritance even if the value of the home goes down slightly. Of course, it does depend on how much of the home is sold. If you sell 95% you might have an issue with inheritance.

Lifetime Mortgage

A lifetime mortgage or rollup plan is the one discussed in most detail here. You have a mortgage, it compounds interest, and you obtain a lump sum to use. Drawdown is a variation on this same product in that you take a smaller lump sum, but gain instalments.

You can think of these instalments as income because you withdraw them as necessary. You can never withdraw more than is available in the equity account; however, you only accrue interest on the amount you use out of the account. It means if you leave a good portion in the account it is not charged interest.

Use the compound interest calculator to determine if an inheritance will be available. When you adopt equity release schemes you are borrowing against your home. Your motivation might be that you need cash funds for retirement purposes be it home improvements, new car, holidays, helping the children or just being able to ’live a little’.