Types of Equity Release schemes:
The lender gives you a lump sum or monthly income (or both). You pay nothing – the interest is ‘rolled up’ into the loan. The amount borrowed plus this interest is repaid out of the proceeds from the sale of the property after you die.
How much you can borrow depends on the value of your home and your age – the older you are, the higher the percentage of your property’s value you can borrow. Generally, you will not be advanced more than 50% of the value of the property.
- 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 Services 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.
Home reversion Plans
You sell your home or a share of it to a reversion company for a lump sum or in return for a monthly income (or a combination of both).
Technically you become a tenant, albeit with the right to continue living in your home rent-free (or sometimes for a nominal rent) for the rest of your life.
When the property is sold – usually when you die – the reversion company gets its payout. If, for example, you sold 50% of your property to the reversion company, it gets 50% of the proceeds – including any growth. If you sold 25% of your property, it gets 25% of the proceeds, and so on.
In addition, the reversion company will also only pay you a percentage of the current market value for the share of your property it buys. This is because you get to carry on living in the property until you die, and the company may have to wait years for its return.
If you sell all of your property to the reversion company, for example, you will typically get between 30% and 50% of its current value. It will rarely be more than 60%. The actual figure will depend on your age (and your partner’s). Older people will get more, and men get more than women – because of differences in how long they are expected to live.
- No ongoing repayments to make, the reversion company make 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 the 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.
Equity Release refers to home reversion plans and lifetime mortgages. To understand the features and risks ask for a personalised illustration.
For Equity Release advice you can choose how we are paid, pay a fee of usually 0.5% of the loan amount or we can accept commission from the lender.