A Guide to the Pros and Cons of Equity Release
Does a Lifetime Mortgage or Home Reversion Scheme Make Sense?
Oct 22, 2009
As people reach retirement age they will often see their mortgages paid off. This does give many significant assets but these aren't generally accessible unless they sell their property and downsize to a smaller one or take up some form of equity release scheme. What are the advantages of this?
Why are Equity Release Schemes Popular?
Many people reaching retirement age in the current climate find that their pensions may not be stretching as far as they had planned. For some this means that meeting their everyday expenses becomes a struggle. Others may find that they cannot afford to do the fun things that they had mapped out for these years.
But, many people are "paper rich" because they now own their homes outright. Using equity release to free up some of this cash simply suits some individuals and couples because it gives them access to a lump sum and/or an income without having to sell their property and move home. There are two primary types of release scheme in the UK that can be considered here.
The Lifetime Mortgage and Equity Release
A lifetime mortgage releases cash from a property via a secured home loan. This can be given with either fixed or variable interest rates and can be paid as a lump sum, a drawdown income (that is accessed regularly or as needed) or as a regular income.
This product will often not need to be repaid until the home is sold, either because the owner opts to downsize, moves into a home or dies.
Home Reversion Schemes and Equity Release
A home reversion scheme can also be set up to pay a lump sum or an income (or a mix of the two). The difference with this product is that the individual sells a share in their property to the lender. This can be all of the property or simply a percentage of it. They then live in the home as a tenant in most cases without rent being charged although some schemes will charge nominal sums or individuals can opt to pay rent to release more cash.
Again, the reversion holder will generally not be paid their share until the property is sold.
Things to Consider Before Deciding to Release Equity
These schemes are usually limited to those aged over 50. Actual age limits may depend on the company or individual that is running the scheme. Although this may seem like an easy solution it should not be entered into lightly as it could come with some disadvantages. For example:
- The sum that needs to be repaid could be high depending on the interest charges levied on the release scheme.
- Individuals will have less/nothing to leave to their families when their house is sold or they die.
- They may incur extra taxation costs with some annuity based products and may lose benefits that are means tested.
- Over time the value of the money that is released now may be worth less but further release options may not be available to use again.
- Any fees or costs involved to set up a scheme may cut into the money that will be released.
Those considering release schemes should investigate all of their options. An equity release calculator will give them an idea of how much they could raise for a start.
Getting impartial advice is also important. The Financial Services Authority (FSA) produces an online brochure that may be useful in the decision making process so this may be worth reading.
Sources: www.fsa.gov.uk
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