Which Equity Release?

You have probably heard a lot about how equity release works, who it is intended for, the different options available and the equity release pros and cons. But, how do the economic conditions affect these equity release schemes and how do we know which equity release to choose? You must know the facts before choosing.

Before you know which equity release to choose, it is important to know that equity release rates are affected by long term interest rates and not residential mortgage rates. A common misconception is that equity release is a bad decision because the rates are higher than those of normal mortgages. But, you need to know that mortgage rates change as the bank changes its base rate and equity release scheme rates remain FIXED for the duration of the loan period.

So, taking into consideration the effect of the interest rate on equity release schemes, what options do you have? The most popular form of equity release is the lifetime mortgage. A lifetime mortgage is a loan taken out on the value of your home and then received as a tax free lump sum or monthly payments. The interest rate is fixed for the loan period, but compound interest gets added to the balance.

Another recent innovation in the lifetime mortgage arena is called a drawdown lifetime mortgage. This is more flexible as the loan amount can be withdrawn as you need it. Interest is only added to the amount you draw, saving you and your beneficiaries’ money in the long run. This is often a more beneficial option when you are worried about the interest accruing beyond affordable means.

Interest only lifetime mortgages are also becoming more popular amongst those whose pension allows them to meet monthly payments in retirement. You pay the interest every month, therefore keeping the balance the same throughout the term of the plan. This protects the value of the inheritance to your beneficiaries. It also requires the use of disposable income, which many individuals do not have in retirement. If you do then consider this option as the best since you only leave the principle balance of the equity release after death or when you move to a retirement facility.

A fixed repayment lifetime mortgage is different as no interest is added to the loan amount. Instead, a fixed amount higher than the loan amount is agreed upon by the lender and the home owner and gets paid back when the house gets sold. Any extra balance after the sale will then go back to the home owner’s estate.

You may be worried about taking out another loan. You may worry about your family and how they will be able to repay it. These are valid concerns. To alleviate them, know that your home is sold to repay the loan if your family does not have the money to make full payment plus interest. It is the loss of a family home, but it certainly does not leave a burden of a mortgage behind.

Additionally, you already know you have no repayment for most lifetime mortgage products during your life. So the only other concern is home value. You know the home value can drop on you as recent events have made this clear. To avoid a negative equity situation take out less in a lump sum and ensure there is a negative equity clause in your contract.

The clause protects your family. Even if the home sale is not enough to cover the principle plus interest the provider cannot request the full amount be paid by your remaining family. Also, your spouse if they survive you can remain in the house until their death or need to move to a retirement facility.

Home Reversion
Of course, lifetime mortgages can still be daunting. If you are not as worried about the home remaining in your possession or family after your death, consider home reversion. You sell part of your home or the entire house to a home reversion provider. In exchange for the sale you get money and a lifetime tenancy agreement. The agreement allows you to live in your home rent free until you decide to move or you die.

Now that you understand how the economic environment can affect an equity release scheme, you can make an informed decision for which equity release is the best. It is safest to deal with a SHIP (Safe Home Income Plans) registered provider which is the trade body set up to provide consumer protection in the equity release market.