Types of Equity Release Schemes
Here are the main equity release schemes with their pros and cons:
Home reversion schemes
account for a tiny part of the market. With these, you sell all, or part, of your home to a company in return for a lump sum, or regular income, and the right to remain living there. When the property is eventually sold, you or your estate only receive the percentage of the property's value that you still own. If, for example, you have sold 60%, you will only keep 40% of the final sale price.
Fees on the schemes vary, but a rough estimate of the cost of setting up an equity release scheme is about £1,500, plus any fee you have to pay your financial adviser.
As a company we no longer give advice on Home Reversion Schemes if however you want more information on these please contact us and we will be happy to refer you to a company that does.
- No ongoing repayments, the reversion company makes all of its money when the property is sold.
- You know at outset what share of your home (if not its value) you will be leaving to your family.
- You continue to share in any rise in the value of your property (unless you have sold its entire value).
- You can take extra cash advances, depending on the amount you originally took.
- If you are a smoker or have a serious illness, you may be able to get a bigger payment.
- The reversion company will buy at a discount to the current market value. The big discount at which the reversion company will want to buy makes these schemes less suitable for people in their 60s.
- If you die soon after taking out a plan, you could effectively have sold off your house (or a share of it) on the cheap. Some schemes give families a rebate if you die within the first few years of signing up.
- Reversion companies can be choosy about which properties they take.
You borrow a lump sum secured against the value of your home. You pay interest each month, but you have a lump sum to spend as you wish. The capital is eventually repaid out of the sale proceeds.
- The amount you owe is fixed so any increase in the value of your home belongs to you or your family.
- You can borrow at a fixed rate so you know exactly what you have to pay every month.
- You need to be able to afford the ongoing interest payments: you should think about investing the lump sum you borrow.
- Many schemes involve buying an annuity. Because annuity rates are so low and they increase with age, these schemes are often only suitable for elderly homeowners.
- Variable rate loans can be very risky: your payments could rise more than your pension or other income.
Home income plans
These used to be the most popular type of equity release plans. You take out a mortgage against your home and use the money to buy an annuity which guarantees you an income for life. Mortgage payments are deducted from this monthly income, although the original capital is only repaid from the sale proceeds, normally after you die.
- Regular income for life and the mortgage interest is deducted automatically.
- The amount you owe is fixed and any increase in the value of your home belongs to you or your family.
- Not suitable for those looking for a substantial lump sum.
- Income is normally fixed at outset, so will be eroded by inflation.
- Built-in annuities are not the most competitive - you are generally better off shopping around for an annuity (if the plan permits this) or investing the money elsewhere.
are the most common type of scheme. These enable you to take out a loan on your property in return for a lump sum, an income or a combination of the two. You continue to own the property. Usually, you will not make monthly repayments and the debt will be repaid only when you die or go into long-term care. As there are no monthly repayments, the interest "rolls up", and this compounding effect will quickly increase the amount you owe.
The most popular sort of lifetime mortgage is the "drawdown" version, designed for those who don't need a large cash lump sum at the outset. Instead, a pot of money is set aside for you to draw from, as and when you need it. You only pay interest on the cash you release, which could save you a great deal of money.
- No interest payable while you are alive, so you will get a higher income for the same sized loan than with an interest-only mortgage or home income plan.
- Most loans are fixed-interest, so reducing risk.
- Plans are available to people as young as 55.
- The provider of a lifetime mortgage will be authorised and regulated by the Financial Conduct Authority.
- The uncertainty about how much will have to be repaid at the end – and how much will be left for your family.
- Interest payments can mount up quickly and will further reduce what your family will inherit.
- Your family could end up with nothing from the sale proceeds even though the lump sum you were lent only seemed a fairly small proportion of the home’s value.
- Interest rates can be high.
- You may not be able to get a top-up loan later.
This is a lifetime mortgage. To understand the features and risks ask for a personalised illustration. Check that this mortgage will meet your needs if you want to move or sell your home or you want your family to inherit it. If you are in any doubt seek independent advice.