A Simple Guide to the Types of Equity Release Schemes
I think you’ll agree with me when I say…
It is challenging trying to choose an equity release scheme that is perfectly tailored to the services you will need.
Or is it?
For individuals who are approaching or may have already reached retirement, may find equity release plans as a means to access money that are tied up within the value of their own home. Well, it turns out that with long and careful considerations, unbiased professional advice and services and by perusing through this information, you can effortlessly select the type of equity release scheme that will help you check out all your ‘financial requirements’ boxes.
All equity release schemes are regulated by the Financial Conduct Authority, and before you make your decision for your future retirement, ensure you research if equity release is awell option for you.
Types of Equity Release Schemes
If you are property rich and strapped for money, taking out an equity release plan might save you and be the answers and solutions to your problems.
An equity release schemes allows you to unlock the value in your house by turning it into a lump sum cash or regular income. It is tax-free and enables you to retain ownership and while occupying your property or until you move into long-term care or die. Only then is your plan usually repaid from the transaction proceeds of your property.
There are two main equity release schemes, namely lifetime mortgages & home reversion plans.
These are the most authorised and regulated kind of equity release schemes.
A lifetime mortgage is a loan secured against your home.
How do these work? These work very similar to how retirement annuity rates are calculated.
By taking out a lifetime mortgage plan, you get access to the principal calculated by the value of your property. The money comes to you as either lump sum or regular income. In some situations, you can even get it consolidated.
The benefits of this scheme is that it allows you to continue owning and residing in your house and while you are charged interest, it is added to the value of the credit so that the actual future borrowing fees increases over time. It means you don’t have monthly remuneration that increase; it is all deferred until refund.
The debt and the policy charges of lifetime mortgages are paid back when your provider puts up your home in the market.
All lifetime mortgages approved by the Equity Release Council come with a no-negative-equity guarantee, meaning you will never owe more than the value of your property.
There are several kinds of lifetime mortgage, all offering a range of features and solutions 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 leading 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 money in a reserve account, ready for ‘drawdown.’
- The interest will not accrue on the principal in your reserve, till you opt to release it, this reduces or stops the impact of interest charged.
- It gives you a safety net of a money reserve you have access to whenever you need it or if you wish to top up your retirement income.
2. Enhanced Lifetime Mortgage
It is specific to one’s health and lifestyle issues, if you qualify this strategy allows you to borrow more money at reduced rates over and above what is standard. In both matters, your life expectancy is used to calculate the maximum amount of equity you can release, or what your lower policy costs will be.
3. Interest Only Lifetime Mortgage
The preference for making monthly repayments upturned the mechanics of traditional equity release schemes. An interest-only mortgage allows you to make monthly interest payments, while also allowing you to maintain a level balance.
Through these reimbursement, you can manage the interest that will need to be repaid when the lender sells your property, making it a very convenient equity release option.
4. Voluntary Repayment Plan
It is the most recent innovation, and allows ad-hoc repayments of interest and/or capital to maintain the remaining amount of your loan. It enables you to make payments of up to 15 per cent of the initial amount borrowed each year (dependent on the providers) with no penalties.
5. Lump Sum Lifetime Mortgage
If you are not interested in the drawdown strategy options or solutions and are looking to have a one-off release equity option, then this should be your go-to strategy. It is, in essence, core lifetime mortgage products with minimal extra features, which on the whole, results in a lower policy charges.
Home Reversion Plans
These shared ownership equity release schemes allow you to sell a fraction of or your land to a provider, and in return, the home reversion firms offer you regular monthly payments, lump sum cash or a consolidation of both.
Even though you do not make interest payments, the home reversion company keeps part of the value of your home when it’s eventually puts it up for sale. The part they own is dependent on factors including your age, the current commercial 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, the specific home reversion provider can potentially provide you with a more significant lump sum, or a lower dividend proceeds of your asset.
The Difference between a Lifetime Mortgage and Home
There are a few vital differences between the two options, but the main thing to keep in mind is that with a lifetime mortgage scheme, you get to own your home and the fixed interest rate agreed at the time you take out the product builds up as compound interest over the years, whereas with a home reversion scheme you will sell a share of your state to release funds from your property and there is no interest building up.
To make things simpler, here is a table or form showing the significant differences between the two equity release schemes.
|Lifetime Mortgages||Home Reversion Plans|
|You unlock tax-exempt capital from your property by taking a loan against your home.||You unlock tax-exempt cash from your property by trading a share (or all) of your property to your 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 schemes let you do so). The interest is added to your debt.||You do not make any monthly repayments – and there is no interest to take care of.|
|The interest is typically added to the mortgage – then the deed plus interest is repaid when the provider puts up your property for sale.||Since your lender will own a proportion of your realty, they will receive a dividend of the profit value based on the estimated value of the property.|
|Fees and tax could apply if you opt to pay back the mortgage early.||If you decide that you want to buy back the share of your home sold to your provider, you will have to settle the full commercial value, and at most times; the figures are usually higher than the original value.|
If you have been dreaming of a sparkling new kitchen or a fantastic conservatory, boosting your pension or giving a handsome inheritance to your family on your retirement, but you do not have the means to live up to these demands, then you need to give your financial specialist 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 other services, don’t hesitate and chat with a specialist service.
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.