A Simple Guide to the Types of Equity Release Schemes
I think you’ll agree with me when I say…
It’s challenging trying to choose an equity release schemes that is perfectly tailored to suit your needs.
Or is it?
Well, it turns out that with careful considerations, unbiased professional advice and by perusing through this guide, you can effortlessly select the equity release scheme that will help you check out all your ‘financial requirements’ boxes.
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Types of Equity Release Schemes
If you are property rich and strapped for cash, taking out an equity release plan might be the answer to all your problems.
An equity release plan allows you to unlock the value in your estate by turning it into a lump sum cash amount or regular income. It is tax-free and enables you to continue owning and living on your property until you pass away or move into long-term care. Only then is your plan usually repaid from the sale proceeds of your property. Learn about how does an equity release scheme work.
There are two main equity release plans, namely lifetime mortgages & home reversion plans.
They are the most popular kind of equity release scheme.
How do they work?
By taking out a lifetime mortgage plan, you get access to capital calculated by the value of your estate. The cash comes to you as either lump sum or regular income. In some cases, you can even get it a combination.
The perks of this scheme is that it allows you to continue owning and living in your home and while you are charged interest, it is added to the value of the loan so that the actual loan amount increases over time. It means you don’t have monthly repayment that increase; it’s all deferred until repayment.
The loan and the interest charges of lifetime mortgages are paid back when your plan providers puts up your home for sale.
There are several kinds of lifetime mortgage, all offering a range of features that can be tailored to meet your needs.
We’ll look at each one in more detail below.
1. Drawdown Lifetime Mortgage
It provides you with a flexible capital reserve facility from which you can take withdrawals as and when required. It is one of the most convenient lifetime mortgage plans because:
- It allows you to keep cash in a reserve account, ready for ‘drawdown.’
- The interest will not accrue on the capital in your reserve, till you opt to release it, thus enabling you to minimise the amount of interest your provider charges you.
- It gives you a safety net of a money reserve you have access to whenever you need it.
Read More On » Drawdown Lifetime Mortgages
2. Enhanced Lifetime Mortgage
It is specific to one’s health and lifestyle issues. If you qualify, having this plan allows you to borrow more money and at a lower interest rate. In both cases, your life expectancy is used to calculate the maximum amount of equity you can release, or what your lower interest rate will be.
Read More On » Enhanced Lifetime Mortgages
3. Interest Only Lifetime Mortgage
The preference for making monthly repayment upturned the mechanics of traditional equity release schemes. An interest only lifetime mortgage allows you to pay off a certain amount of interest every month, while also allowing you to maintain a level balance.
Through these repayments, you can manage the amount of interest that will need to be repaid when the lender sells your estate, making it a very convenient equity release option.
Read More On » Interest-Only Lifetime Mortgages
4. Voluntary Repayment Plan
It is the most recent innovation, and allows ad-hoc repayments of interest and/or capital to maintain a level balance. It enables you to make payments of up to 15 per cent of the initial amount borrowed each year (dependent on the plan providers) with no penalties.
Read More On » Voluntary Repayment Lifetime Mortgages
5. Lump Sum Lifetime Mortgage
If you are not interested in the drawdown plan and are looking to have a one-off release of equity, then this should be your go-to plan. It is, in essence, a core lifetime mortgage product with minimal extra features, which on the whole, results in a lower interest rate.
Read More On » Lump Sum Lifetime Mortgages
Home Reversion Plans
These shared ownership equity release schemes allow you to sell a portion of or your entire estate to a plan providers, and in return, the home reversion companies offers you regular monthly payments, lump sum cash amounts or a combination of both.
Even though you do not pay interest on the loan you take, the home reversion company possesses a percentage of the value of your home when the lender eventually puts it up for sale. The portion they own is dependent on factors like– your age, the current market value of your property, and its condition.
With this scheme, the older you are, the more equity you will be able to release. Moreover, if you happen to have a history of poor health, then specific home reversion providers can potentially provide you with a more significant lump sum, or a lower percentage sale of your estate.
Read Our In-Depth Article » What is a Home Reversion Plan?
The Difference between a Lifetime Mortgage and Home Reversion Plan
There are a few key differences between the two, but the main thing to keep in mind is that with a lifetime mortgage scheme, you get to own your home, whereas with a home reversion plan you will sell a share of your estate to release cash from your property.
To make things simpler, here is a table showing the key differences between the two equity release schemes.
|Lifetime Mortgages||Home Reversion Plans|
|You unlock tax-free capital from your property by taking a loan against your home.||You unlock tax-free cash from your estate by selling a share (or all) of your property to your plan providers.|
|You still own 100% of your property||You might own a part of your property, and live there rent-free.|
|You do not have to make monthly repayments (even though some plans let you do so). The interest is added to your loan.||You do not make any monthly repayments – and there is no interest to pay.|
|The interest is typically added to the mortgage – then the loan plus interest is repaid when the plan providers puts up your estate for sale.||Since your lender will own a proportion of your estate, they will receive a percentage of the sale value based on the portion of the property they possess|
|Fees could apply if you opt to pay back the mortgage early.||If you decide that you want to buy back the share of the estate you sold to your plan provider, you will have to pay the full market value, and at most times; the rates are usually higher than the original amount.|
Read More On » Types of Lifetime Mortgages
If you have been dreaming of a sparkling new kitchen, a fantastic conservatory, boosting your pension, giving a handsome inheritance to your family, but you do not have the means to live up to these demands, then you need to give your financial adviser a call and take out an equity release plan. With all the options available, you can get the best deal and live the best retirement life.
If you, however, need more information on these plans and others, don’t hesitate and chat with an expert for free.
How much money could you release?
An equity release allows you to access the value of your home, tax-free without having to sell up, so that you can have money to spend on whatever you want or need.