What is an equity release scheme?

Equity Release is a great way for older homeowners to secure their financial future without needing to sell their home or move. Homeowners might be looking to release equity for a number of reasons, and it's often explored as an alternative to taking out a loan, remortgaging a home, or downsizing. Many choose to pursue equity release as the best schemes can often provide more financial capital than a loan or any of the other potential options.

There are two types of equity release: lifetime mortgages, and reversion schemes.

Homeowners should be sure they have taken the necessary financial and legal advice before deciding that equity release is for them, as the money received may affect means-tested benefits, including pensions, and the value of their estate upon death.

How Does Equity Release Work?

Essentially, equity release does what it says. Homeowners use the equity built up in their property to take a cash sum. This is typically in the form of a one-off payment, but structured release schemes are available too, so that released equity is received as a regular income.

As younger homeowners will usually not have built up enough equity, release schemes are often limited to over 55s for lifetime mortgages, with reversion plans exclusively for over 60s.

Lifetime Mortgages

A lifetime mortgage is typically the most popular type of equity release; these allow homeowners a choice of a lump sum or a regular income, while there is usually an option for a combination of the two. To what extent a lump sum and then an income can be taken will depend on the amount of equity available for release.

Under the terms of a lifetime mortgage, homeowners still own the property, and usually are not required to make a monthly repayment. Instead, interest on the equity released accrues at a percentage rate.

As interest is only paid on cash taken, “drawdown” lifetime mortgages, where money is received as an income, tend to be most popular.

Home Reversion

Home reversion represents a very small part of the equity-release marketplace, but are an option available to homeowners.

Home reversion involves a homeowner selling their home, or part of their home as a percentage figure, to a company in return for a lump sum of cash, and the right to live in the property. Upon the sale of the property, the homeowner (or the homeowner’s estate) receives another sum based on any percentage of the property still owned. For example, if a homeowner entered a home-reversion scheme, selling 50% of their property, then died five years later and the house was sold, 50% of the home’s sale value would go to their estate.

Equity-Release Fees

It is worth noting that setting up an equity-release scheme does incur fees, usually estimated at around £1,500, non-inclusive of any additional fees payable to a financial or legal adviser.

How Much Equity can be Released?

Lifetime mortgages will typically release up to 50% of the value of a property, while those taking the home-reversion route are often offered a purchase price for the whole share in a property.

How Does Equity Release Affect My Family?

It is widely recommended that homeowners speak to family members, particularly children and grandchildren, while considering equity release. As equity release could have an impact on inheritance – irrespective of whether children “expect” to inherit a home as part of an estate – this is considered a vital conversation.

When a homeowner with a lifetime mortgage dies, the property is typically sold so the money paid out as part of the equity release can be repaid. Any remaining capital then becomes part of the deceased’s estate.

Homeowners are encouraged to take out equity-release schemes only from members of the Equity Release Council. Council members offer “no negative equity” guarantees, ensuring homeowners never owe more than the value of their property and that debt is not left to an estate to be dealt with following a person’s death.

We have plenty of advice to help you with Equity Releases.

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