Equity release explained

As we come into the latter stages of life, the topic of money becomes a pressing issue, as we look for alternative sources of income after completing our working years. Obviously the most obvious foundation for a healthy retirement is our pensions, but not everyone is fortunate enough to have a healthy financial profile as they look to put their feet up and require something of a nest egg.

That’s where equity release comes into the frame; those who can be described as “property rich, cash poor” have themselves in a very good position to gain financially from their property. Equity release is not something to be taken lightly and should be looked into with a stern eye for detail and there are two types of equity release that can be considered: lifetime mortgages and home reversion schemes.

Lifetime mortgages

A lifetime mortgage is the most popular choice when it comes to equity release schemes and the basic premise is that the scheme allows you to raise a tax-free lump sum at a fixed interest rate and this is then added to the loan that is the mortgage.

There are two sub-types of lifetime mortgages which comprise of the ‘roll-up’ scheme, where no monthly payments are made, and the interest-only lifetime mortgage, where any interest charged can be repaid. Either option entitles the customer the security of owning 100 per cent of the property. This is the predominant advantage of such a scheme, with others being that you will benefit from any future increase in your properties value, as well as having the ability to secure and protect a portion of your estate for your family. Just make sure you watch out for schemes with early repayment charges.

Home reversion schemes

A home reversion scheme is perhaps more risky than a lifetime mortgage, as you are asked to sell a percentage of your property to the provider for less than the market value, although you do have the right to stay in your home for the rest of your life.

When the property is sold when you die or move into a care home, the provider gets the same share of whatever your home sells for as repayment; so if you sold 25 per cent of your home to the provider, they would get 25 per cent of the sale price.

Equity