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Understanding Equity Release Schemes

The thinking behind equity release is really quite simple: over the years, you have steadily been paying off your mortgage, so that your financial stake in your home (the equity) grows more and more in value – at a time when the appreciation in house prices has also significantly increased its market value.

The problem is that this personal wealth remains locked up in the property unless you find the means of unlocking it, in order to realise the cash which you may then spend on some of the luxuries you’d promised yourself to buy, holidays, a world cruise maybe, or simply as a way of financing your retirement.

Equity release schemes provide you just such an opportunity – an opportunity which as many as one in three home owners over the age of 50 are now seizing upon to make their lives, and their homes – more comfortable as they approach retirement.

How it Works

There are many different equity release schemes offered by an array of providers and these may be divided into two broad categories:

Lifetime Mortgages

  • Just as the term suggests, these schemes involve an effective re-mortgage of your home, with a repayment period that extends for the remainder of your life or until you need to move out of your home and into long-term care;

  • Unlike other mortgages, however, you do not need to make monthly repayments of either capital or interest (although some schemes may allow you to make such monthly payments) – instead the interest is compounded or rolled up over the years and repaid only when you die or move into long-term care;

  • Throughout the term of the lifetime mortgage, you and your partner (if you have one) retain the right to continue to live in your home and the mortgage does not need to be repaid until the last of you dies or moves into long-term care;

  • The industry’s self-regulator, the Equity Release Council points out that you need to be at least 55 years of age to participate in such equity release schemes and that, if you are part of a couple, the younger of you both needs to be at least 55;

Home Reversion

  • An alternative form of equity release – for which the minimum age is 60 – is known as home reversion;

  • Under these schemes, the provider purchases a percentage of the equity you own in your home;

  • In return, you receive a cash payment (or cash instalments paid at regular intervals) and a lifetime lease which allows you to continue to live in your home for the remainder of your life or until you move into long-term care, without the need to pay any rent;

  • When you die or move into care, the house is sold and the proceeds are split between the equity release provider and your designated heirs in exactly the same proportions as the share you initially sold.

If you still have any outstanding mortgage balance to pay on your home, this needs to be paid off before you take advantage of any equity release scheme.

Equity Release May Not Be For Everyone

Equity release is a serious decision and one that might not be for everyone.

A real concern for many homeowners, for example, might be the extent to which equity release prejudices the type of inheritance left to pass on to children or other members of the family.

It is a concern resolved by some homeowners by using the proceeds from an equity release scheme to pass on as an immediate gift – by way of paying for a wedding, the deposit on a first home, or help with meeting the expense of education for any grandchildren.

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