Equity release is simply a vehicle for using your main residence containing much equity & exchanging this equity for a tax free lump sum or regular income. It is now common with retirees who feel that life should be more fulfilling & need to spread their wings in order to achieve life’s ambitions.
There are two main types of equity release schemes; a lifetime mortgage & home reversion plans.
- Types of Lifetime Mortgages
With a lifetime mortgage the householder retains 100% ownership of the residence & can live there for the rest of their lives with no monthly payments ever required. With a home reversion plan partial or full ownership of the home in question is assumed by the lender. In exchange for selling part or all of the property, money is exchanged from the lender to the applicant. The mortgage is finally repaid after the borrower has died or gone into long term care. Normally, the most suitable applicants for this plan must be 65 years and above.
There are different types of equity release plans namely; drawdown lifetime mortgage, home income plans and interest only mortgage plans. The drawdown lifetime mortgage plan is a form of equity release plan whereby the homeowner does not vacate the home and continues as the rightful owner until death from where the lender assumes ownership. The interest only plan is almost similar to lifetime mortgage but in this case the homeowner is expected to make monthly interest payment to the lender. Lastly, the home income plan is the scenario where the homeowner takes cash from lender and places it in an insurance annuity where they’ll be entitled to monthly income until the time of their death.
How Equity Release Can Help
The advantages of getting equity release schemes include the ability to turn your life around and use the money to enhance your retirement years. It also gives homeowners steady income to supplement their retirement plans & at least guaranteeing them a livelihood. In case the equity release balance surpasses the property valuation on death or long term care, the homeowner is not affected in anyway so they have the protection of the no negative equity guarantee.
The only known disadvantage is that a home with an equity secured upon it cannot automatically be transferred to the beneficiaries. Instead the equity release mortgage must be repaid by some means. This is usually upon sale of the property, which most lenders provide a 12 month window for this to occur.
The worst case scenario is when one has subscribed to the home income plan or home reversion plan and unfortunately passes away almost immediately or only a few years after placing their cash in annuity. This winner on this occasion will be the equity release provider. Conversely, should the homeowners live beyond their normal life expectancy then they will be the winner.
Reviews of different plans continue to be considered and with time lending agencies in conjunction with the government are expected to make amendments with respect to long term care issues & mental health.