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Equity release

A large number of people in retirement find themselves ‘house rich but income poor’. In other words, the majority of their wealth is tied up in the home when what is really needed is an income to boost the standard of living. Before entering into an Equity Release Scheme consideration should be given to the more cost effective option of downsizing to a smaller property, thereby releasing funds. Local Authorities may also offer grants which could provide necessary finance.

Any decision should also involve family members as embarking on Equity Release will effectively reduce the value of an individual’s legacy and may have also have an adverse impact on existing and/ or future entitlement to various state benefits.

There are two main types of Equity Release Scheme:

• Regulated Lifetime Mortgages allow homeowners to release equity built up in their home, without having to sell it, and can provide older borrowers the opportunity to create a regular additional income, or a cash lump sum. The commonnest way of using a Lifetime Mortgage is to take a lump sum, which is dependent on both age and property value. The percentage of the property value, which is available as a loan, increases with an individual's age.
  
  Alternatively a monthly income can be provided for life (or until such time as the borrower requires long term care or moves into sheltered accommodation). This would be attained through monthly ‘drawdown’, or through the purchase of an annuity which, in exchange for a lump sum will pay a pre-determined income for life.
  
  Interest on the loan is rolled up, i.e. added to the outstanding loan amount each year, generally at a fixed rate, which means you make no repayments of either interest or capital during the lifetime of the loan. The fixed interest rate provides the security of knowing what the total interest charges will be, regardless of any interest rate fluctuations in the marketplace.
  
  Lenders who are members of the independent organisation, SHIP (Safe Home Income Plans) must provide specific safeguards to borrowers such as a 'No Negative Equity Guarantee'. With the value of house prices fluctuating over recent years, the situation could occur where the loan and interest combined is greater than the property value, at repayment. The guarantee ensures that no more than the open market sale proceeds of the property will have to be repaid and provided that terms are honoured the lender will not repossess the property if the accumulated debt exceeds the property value.


• Home Reversion Schemes are another method of releasing equity from your home would be via a Home Reversion Scheme. This is similar to a Lifetime Mortgage, in that a lump sum or regular income can be provided. However, a proportion of your home is sold to a reversion company when the loan is arranged. Upon the eventual sale of the property, the reversion company acquires the same proportion of the proceeds.