Equity Release Explained

by Mark Johnston

Recent rises in household bills and an increase in inflation levels has caused a shortfall in pension provisions.

Many people who have retired and have a limited pension are now in a worse situation than in the past. Statistic’s show that their pension barely allows them to fulfil their basic needs, let alone have anything left for luxuries.

It is not all doom and gloom however, especially for those with properties and equity tied up in them. Their property can allow them to release tax free cash, either in a lump sum or in staged payments.

Equity release is a way of raising money against the value of your home. Equity release has been around for a long time, although not everyone know or understands it.

Andrea Rozario, director general of safe home income plans (SHIP) states that “the UK population is ageing and with insufficient pension provision and the prospect of meeting significant care costs, we expect the demand for equity release products to increase significantly over the next few years”.

Research shows that there are approximately 23 providers offering equity release products on the market at the moment. The equity release trade body has recently revealed that its members have seen the number of customers grow by more than 10% in the past few months.

There are two main types of equity release schemes; lifetime mortgages and home reversion schemes.

A lifetime mortgage means home owners borrow a proportion of their homes value and interest is then charged on this amount. However nothing has to be paid back until the home owner dies or sells their property. The only other problem with this is that the interest is compounded over the period of the loan, which means the debt would have almost doubled in 11 years, at current rates. Lifetime mortgages are open to anyone from the age of 55.

The home revision scheme is where a home owner usually sells a share of their property to a provider, for less than the market value. They still have a right to stay in their home for the rest of their life. However once the home owner dies, moves in to a care home or sells the property  the provider gets their share of whatever the property sells for. For example if they sell 45% of their property then the provider would get 45% of the sale prices. These particular schemes are usually only and option for those aged 65 or older.

Equity release schemes are designed to be a lifelong commitment and can be a very complex subject; therefore it is vital that home owners seek independent financial advice before signing up to anything.

Safe home income plans (SHIP) is the trading body for lenders offering equity release schemes and all members have a ‘no negative equity’ guarantee, which means a home owner will never owe more than the value of their home.

Home owners should also remember to consider other alternatives before committing to these schemes, such as selling the property to downsize to a cheaper one or borrowing money from relatives. They should also be aware that if they are claiming state benefits releasing equity could effect their entitlement.

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