31 January 2013
Equity Release Schemes: What are your options?
If you are approaching retirement and have a lot of money tied up in your home, you might want to consider an equity release scheme as a way of providing extra funds for your old age.
Equity release schemes come in a variety of forms, but they all make use of the equity stored in your property in order to provide you with additional funds for your retirement. Bower advise on equity release schemes to suit a range of circumstances, and your choice may depend on a number of factors such as age, life expectancy, and the value of your property. The two main types of equity release schemes are lifetime mortgages and home reversion schemes.
With a lifetime mortgage, you can borrow money using your home as collateral. As with any other type of secured loan, interest is charged on the amount, but you don’t usually have to pay anything back until you die or sell your home. The interest is simply added on to the total repayment, so at the current rates the debt would be approximately doubled over an eleven year period. Unlike a typical mortgage, in which interest accrues on an ever-decreasing amount due to repayments, the interest on lifetime mortgages is charged on an increasing amount, which means that the debt can grow quite quickly. However, it is worth noting that the industry-wide ‘no negative equity guarantee’, as set down by the Equity Release Council, means that you will never have to repay more than the value of the property. The debt would typically be paid back with the proceeds of the sale of your home.
The majority of lifetime mortgages offer a fixed rate of interest, which provides a degree of certainty about how much will have to be repaid. The minimum age for taking out a lifetime mortgage is typically 55, and the maximum age is usually between 85 and 95, although some providers do not have this restriction.
Home Reversion Schemes
With a home reversion scheme, you sell a share in your property for less than the current market value to the provider but there is no rent to pay. Then, when you die or move into residential care, your property is sold, and the provider will be repaid with the same share of the sale price. So, for example, if you sold 50% of your property to the provider, they would get 50% of the sale price. These schemes are typically only available to those who have passed the retirement age of 65.
In addition to the legal fees, which you also have to pay with a lifetime mortgage, you will normally also have to pay a valuation fee. Depending on the product, you can usually sell between 25% and 100% of your property to the provider. The amount that you receive depends largely on your life expectancy. The older you are when you sell a share in your property, the more money you are likely to get. Some schemes give you the option of an ‘early vacancy guarantee’, which guarantees that your estate will get a certain proportion of the property value back if you die or move into residential care within four or five years.