Equity Release Loans
Equity Release helps homeowners of 55 years and over to release capital tied up in their home without the need to take out a traditional mortgage. Depending on your age and the value of your property you can choose how much equity to release. The released capital is in the form of cash and you are therefore free to choose what to do with it. Unlike a traditional mortgage, no repayments are made until death or if you move into long term care, in which case the house is sold and the loan repaid. Any balance of the value of the house is therefore paid into your estate.
There are a number of current Equity Release providers many of which offer various different plans.
The schemes discussed in this section of the website differ not only in the way they work but also the:
- interest charged
- minimum age and property criteria, and
- more importantly the amount of money they will release
Many people are still sceptical of Equity Release schemes having heard of people that have been threatened with eviction when their schemes imploded in the early 1990s. But this industry has changed a lot and with the advent of self-regulating bodies like the Safe Home Income Plan [SHIP] there is now ZERO chance of either you being evicted or falling into the negative equity trap. It should be pointed out though that not all Equity Release providers are members of SHIP.
Want advice on Equity Release?
This guide to Equity Release has been designed to give you an insight into the different schemes available, and their relative benefits.
The industry is also getting more competitive as new providers are moving into the market.
Our advice is to look very carefully at all the plans and schemes on offer, and those in no real hurry will stand a far better chance of getting the best deal.
To sum up, if you’re over 55 years old, own your home (or have a small mortgage) and want to release capital without selling, then Equity Release is something you should consider
The Benefits of Equity Release
For many home owners rising property values cause a nice dilemma. On one hand it is likely your home has increased in value significantly over the years but on the other the capital increase is tied up and doesn’t filter through in hard cash. Before Equity Release Schemes the only way to get the excess capital out of your home was to sell and move down the property ladder. But this caused problems because many people viewed their property as more of a home, perhaps becoming attached to both it and the surrounding people / area over many years.
So the real attraction of equity release is where nothing changes, you still live in your home but the money released can improve the way you want to live.
However Equity Release schemes are not right for everyone. The disadvantages are that they are often inflexible and somewhat expensive so it is advised that prospective applicants look at and explore other ways of raising cash.
Equity Release Plans or Schemes
Currently there are 2 different types of specialist Equity Release Plans or Schemes.
Lifetime Mortgages
Theses are where you take out a loan secured on your home. These are the most popular.
Reversionary Schemes
Theses are where you sell a percentage of your home in return for an amount to be paid either as a lump sum or more commonly as an extra income.
Three Main Types of Lifetime Mortgages
- Home Income Plans [HIP]
- Roll-Up Mortgages, and
- Drawdown Mortgages
Home Income Plans [HIP]
The value of your house is used as security against a cash lump sump. The cash is then used to buy an annuity which gives a monthly income for life. Part of the income is used to pay the interest on the mortgage and the remaining net balance is yours. The loan principle is repaid when the home is eventually sold.
However interest only mortgages are not that common because the net income received (after paying the interest bill) is usually very low. This type of equity release scheme is therefore mainly suited to people over 80 years.
How Much Can You Borrow with a Lifetime Mortgage?
The amount offered by different Equity Release providers varies depending on your age (or youngest age if joint) and the amount of interest charged. Typically schemes offer between 15% - 35% of the value of the home at age 60 or under going as high as 50%-60% if the person is over 70-75. Built into most schemes is the potential ability to receive further payment as you get older.
Lifetime mortgages are widely available from age 60, a few companies offer the lower aged bracket at 55 but others will only offer policies to couples when the youngest is 65. As you can see there is really no standard scheme in operation with all the service providers offering very different products and guidelines.
Disadvantages of Lifetime Mortgages:
Under this type of arrangement you have no control over how much of the property will be left when you and/or your spouse dies. Compound interest also grows faster than simple interest.
Some Lifetime mortgages also carry early redemption fees if you wanted to repay the loan. Even if it is an unlikely event that you'll be wanting to repay your loan early you should still make sure that you understand the types of fees involved and whether they're realistic or not - but with increased competition in the sector early penalty fees should become less of a problem in the coming years as providers compete for business.
Roll-up Mortgage
A loan is taken out which is secured against the value of your home.
No repayment of the loan principal or the interest (which may be fixed or in some cases capped) is necessary until the property is sold. Upon the sale you or your estate will get the balance between the sale price and the amount required to repay the loan plus the accumulated interest
Take special note that compound interest (paying interest on interest) is at work with a Roll-up mortgage which means that the debt will increase over the years. And because of this fact you'll often find that the amount you can borrow is relatively small as a percentage of the property's value.
Roll-Up Mortgage & Negative-Equity
With a Roll-up mortgage it is still possible, especially if you live a long time, for the amount that you owe on your loan to be more than the value of your home, so called negative equity.
Because there is no standard type of equity release package different lenders have different policies to the negative-equity effect. Some may ask you to start paying the interest on the loan while others may charge your beneficiaries the extra interest bill after your death. Clearly these sorts of questions must be asked and understood when the policy is initially signed for.
But there are ways to protect yourself from the effects of negative-equity. Some equity release providers, notably those whose schemes are SHIP* approved offer a 'no negative-equity guarantee'. It means that both you and your beneficiaries will never have to pay more than the value of your home should it fall through the negative-equity trapdoor. This is very good news and sets today's Equity Release schemes apart from the plans originating in the early 1990s which is where all the controversy originates from.
* Safe Home Income Plans [SHIP] is an organisation supported by the leading providers of home income and equity release plans. It was launched in 1991 and is dedicated entirely to the protection of planholders and promotion of safe home income and equity release plans.
Drawdown Mortgage
There is another type of Roll-up mortgage called a drawdown mortgage. Instead of taking a cash lump sum in the beginning a smaller cash amount is taken with the option of drawing down more cash either when needed or on a regular basis perhaps monthly or quarterly. Perhaps you agree to borrow a total of £50,000 but want just £15,000 in the beginning to build an extension to your present home. You still have the potential to withdraw another £35,000 in the future while only paying interest on the £15,000 already drawn down.
The advantage of a drawdown mortgage is that because you're taking out the money over a period of time there is less interest and compound interest to pay. And like a Roll-up mortgage the loan is repaid when the house is sold.
Other Style Lifetime Mortgages - Shared Appreciation Mortgage - SAM
There is also a product on the market called a Shared Appreciation Mortgage, SAM for short. Again a cash lump sum is paid out which is secured on the property but interest is either waived on the loan or is paid at a reduced rate. The lender will instead agree with you to share part of the potential increase in the value of the property.
For example: You take out a shared appreciation mortgage of £30,000 and receive a cash lump sum. No interest is charged by the lender and you don't have to pay back any of the principal either. But when you die or the house is sold the lender is repaid the loan principal of £30,000 alongside a percentage of the property's gain for example 50%.
If the property was originally worth £100,000 but is worth £150,000 when sold then the lender would receive the £30,000 loan principal plus 50% of the increase or £25,000. The balance of £95,000 would go to the beneficiaries.
Equity Release Information
Further information is available from the following links: