Types of equity release
Selecting the right scheme depends on many factors, such as your age, the type of property you own and how much capital you need to release. Feeling confident in your choice is vital, so ask us to research your options and source the best scheme for you.
There are two main types of equity release plans.
Home reversion plans
With this scheme, you sell your home – or more usually a part of it to a ‘reversion company.’ You won’t, however, receive the full market value when compared to selling it privately on the open market. Instead, the reversion company gives you the right to live in your home rent-free for the rest of your life.
Depending on factors such as your age and the value of your property, you may only receive 35% or even less of the market value of your home and you will rarely receive over 60%. When your home is sold, the reversion company receives a pro-rata share of the proceeds from the sale. For example, if you sold a 50% share of your home to the reversion company, it would receive 50% of the proceeds. These plans are generally only available to people over 65.
With a lifetime mortgage, you take out a loan against the value of your home. The lender gives you either a lump sum, a monthly income or a combination of the two.
Commonly, you don’t make any payments until the property is sold. Instead, the interest on the loan is added to the total owing. Because interest is rolled up in this way, the amount you will need to pay back when the property is sold can grow very quickly.
Of course, the value of your property could go up even faster than the amount you owe. This could reduce or even eliminate the effect of rolled up interest on the amount of equity you have in your property in the future. On the other hand, if property values fall, there might be a shortfall. Consequently, interest owed will erode your equity in the property much more quickly. Don’t forget, there is no guarantee property values will continue rising in the future.
Alternatively, there are schemes that give you the choice to make interest payments over the term. A financial adviser can help find the right scheme for you.
If you live in your property for some time after the plan is taken out, or if property values fall, it is possible that you will have no equity left in your home, and therefore nothing for your beneficiaries to inherit. Therefore it is a good idea to discuss your intentions with family members.
This advert refers to home reversion plans and lifetime mortgages. To understand the features and risks ask for a personalised illustration.