Now here’s something we’ve never discussed before on this site – equity release; if you’re a homeowner of 50-55 years and older, equity release schemes are one of many debt solutions you might wish to consider.
What is Equity Release?
To explain how equity release schemes can help, we first need to look at exactly what equity means in the context of the housing market. In very simple terms, The equity in your home is the difference between what your property is worth and any outstanding debt secured against your house. So releasing this money is simply getting hold of money that is yours anyway, which means that there is no tax payable on any funds you receive. There are numerous equity release plans on the market and it really is a case of buyer beware before signing anything.
However, the main points about equity release are:
- You have to be over a certain age (typically over 50) and own your own home
- You can get a cash lump sum, a regular income, or both, to use as you wish
- You can continue to live in your home
- You continue to be responsible for maintaining your home.
In essence, there are two main types of equity release scheme – lifetime mortgages and home reversions. In this post we’ll look at the different types of lifetime mortgages and, in the next post, we’ll concentrate on home reversions.
Equity Release: Lifetime Mortgage
- You take out a loan that is secured on your home (that is, the lender knows they can get their money back by selling your home)
- You continue to own your home, although you will have to pay back the mortgage on it;
- You repay the mortgage from the proceeds of the sale of your home when you die, or if you move out
With this type of Lifetime Mortgage, you borrow the cash as either a lump some or as regular income. Fixed or variable interest is added to the loan monthly or yearly. But you do not pay the interest until your home is sold. This could be when you die or need to go into a care home.
The main point to bear in mind here is that interest is compound that is it is charged on the loan and also on all the interest that has already been added. This means that the amount owed grows quickly – particularly if you have taken the money as a lump-sum. As an example, if you took a lump sum of £45,000 at, say, 5% interest a year, this is how the amount owed would grow over 25 year period:
Number of Years since Loan
Amount you Owe in £
Obviously, the higher the interest rate, the higher the amount you will eventually pay back.
Draw Down Mortgage
This is another type of Lifetime Mortgage. With the Draw Down Mortgage, rather than taking out a single lump sum, you take smaller amounts over a period of time; these amounts can be taken at regular intervals or as and when you need them. Interest is not paid until the loan has been repaid.
Interest Only Mortgage
You borrow a cash lump sum and pay back the interest on the loan each month at either a fixed or variable rate. If you are on a fixed pension you could find a variable rate mortgage difficult to repay if interest rates rise. You don’t pay back the original amount of the loan until you sell your house.
Fixed Repayment Mortgage
Once again, you borrow a cash lump sum but, rather than being charged interest over the lifetime of the loan, you promise to pay the lender more than you originally borrowed when you eventually sell your home. The amount you will repay is fixed when you take the loan out.
The downside of this scheme is that the lender may charge interest on this higher sum from the date you die until the mortgage is actually repaid, thus putting pressure on your loved ones to sell the home.
Home Income Plan
Another scheme where you take out a lump sum, which is used to buy an annuity that gives you a regular income, usually fixed for life. You pay the interest on the loan, usually at a fixed rate, from the income provided by the annuity. The amount you originally borrowed is repaid when your home is sold. This is really a scheme for older people as, if you take the annuity soon after retirement, the income from it will be fairly low. The older you are when you buy an annuity, the higher the income you’ll get, as there are fewer years over which the income will need to be paid.
Shared Appreciation Mortgage (SAM)
With a SAM you agree with the lender that they can have a share in any increase in the value of your home when it is sold in return for them charging you less or no interest on the loan.
Find an Equity Release Adviser