Equity Release
The equity, or value, you have in your home is its open market value less any mortgage or other debt held against it. Equity release is a way of getting cash from the value of your home without having to move out of it.
Equity release plans are also called lifetime mortgages, home reversion or home income plans. These schemes essentially allow you to borrow money against the value of your home, with the debt being repaid from the sale proceeds after your death.
Equity release plans can be very complicated products and are not necessarily suitable for everybody. Your house is almost certainly the most expensive asset you own; it is also your home.
Good advice is therefore vitally important. Age Concern and the Financial Services Authority, the UK’s chief financial watchdog, both recommend getting independent advice before proceeding. At Martyn Prowel Solicitors we are familiar with all the different types of schemes available. We will ensure that you fully understand all the implications of such. Although you could choose not to take advice, we strongly recommend that you do.
Basically there are two mail types of Equity Release Schemes:
Lifetime Mortgages
With a lifetime mortgage, you:
- take out a loan that is secured on your home.
- continue to own your home, although you will have to pay back the mortgage on it.
- repay the mortgage from the proceeds of the sale of your home when you die, or if you move out of it (perhaps to a care home).
There are different types of lifetime mortgages:
- Roll up mortgages
- Interest only mortgages
- Fixed repayment mortgages
- Home income plan
- Shared appreciation mortgage (SAM)
Home Reversions
A reversion company buys, or arranges for someone else to buy part, or your entire home. You get the sale proceeds as a cash lump sum, an income, or both. You can invest the lump sum yourself as another way of providing an income – some schemes can do this for you.
You will normally be paid less than the full market value of your home – typically between 35% and 60% – because the buyer cannot re-sell the property until you die or until you move out (perhaps into a care home). Some facts about home reversions
- The older you are when you start the scheme, the higher is the percentage you’ll get.
- The minimum age for these schemes is usually higher than for lifetime mortgages.
- You also usually get a lease giving you the right to carry on living in the home for the rest of your life (or until you no longer need it).
- Usually you do not pay rent, or if you do it is a token amount. But with some schemes, you can pay a higher rent in return for more money from the sale.
- Once the scheme has started the buyer of your home benefits from any rise in its value. If you have only sold part of your home, you benefit from any rise in the value of the part you have kept.
If you are considering equity release,
Glossary of Terms
Annuity
An investment that converts a lump sum into income that is taxable.
Arrangement fee
A commitment or administration fee that you usually pay the lender to reserve the mortgage funds.
Equity release
A way you can benefit from the value of your home without having to move out – by borrowing against it or selling all or part of it for a regular income or a lump sum.
Home income plan
A loan that pays you a cash lump sum with which you buy an annuity to give you a monthly income, usually fixed for life. Part of the income is used to pay the interest on the loan.
Home reversion
A type of equity release scheme – you sell all or part of your home to a scheme provider in return for regular income or a cash lump sum or both, and continue to live in your home for as long as you wish.
Lifetime mortgage
A type of equity release scheme – a loan secured on your home, which is repaid by selling your home when you die or go into long-term care.
Negative equity
When the amount you owe the lender is more than the value of your home.
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