About Equity Release
Equity release schemes allow you to release tax-free cash from your home to boost your finances in retirement. The two main types of equity release schemes available are lifetime mortgages and home reversion plans.
Lifetime Mortgages
A lifetime mortgage is where a loan is secured against your property to provide you with a tax-free cash lump sum or a regular income to spend as you wish, typically with no monthly repayments to meet. Usually interest is added to the lifetime mortgage loan throughout your lifetime, accruing at a fixed or variable rate.
The loan plus interest is eventually paid back when the home is sold, usually when you move into long term care, or when you and your partner die. You can typically release between 18-50% of the value of your home with a lifetime mortgage, depending on your age.
Advantages of a lifetime mortgage
- A lifetime mortgage gives you the choice of a cash lump sum or income, typically with no monthly repayments to meet
- You retain full ownership of your home
- Lifetime mortgages are available to younger people (aged 55+)
- No negative equity guarantee
- Some lifetime mortgage schemes let you guarantee an inheritance for your family
- All equity release schemes are regulated by the Financial Services Authority
Disadvantages of a lifetime mortgage
- The amount you leave as an inheritance will be reduced
- The interest applied can grow quickly as it is compounded
- You can't usually raise as much money with a lifetime mortgage as you could with a reversion scheme, especially at younger ages
- If you repay the lifetime mortgage early, you may have to pay an early repayment charge
Home Reversion Schemes
With a home reversion scheme you sell part or your entire home to a reversion scheme company in exchange for a tax-free cash lump sum and a guaranteed lifetime lease with no monthly repayments to meet. You stay in your home rent free for as long as you choose and are able to guarantee an inheritance to your beneficiaries.
Both you and the reversion scheme company may share in any increase in your property's value, providing you have not exchanged 100% of its value.
Advantages of a home reversion plan
- You are able to guarantee an inheritance
- There are no monthly repayments to make
- You benefit from any increase in value of the percentage of the property that you still own
- Reversion plans may be available to those aged 55+ and you can typically raise more money from your home at a younger age with a reversion plan than a lifetime mortgage would allow
- The older you are, the more money you will be able to release with a reversion plan
Disadvantages of a home reversion plan
- Typically, you do not receive the full market value of the share of the property you sell because the reversion plan company will give you the absolute right to live in it rent free for the rest of your life, and will not get their money back for a number of years
- The reversion plan company owns a share of your home and will also benefit from any increase in value
- Reversion plans cannot usually be reversed as you are selling part of your home
- The majority of reversion plan providers do not guarantee further advances
Lump Sum versus Drawdown Lifetime Mortgages
A lump sum product is a tax-free cash loan, secured against your property, which interest is added to throughout your lifetime, accruing at a fixed or variable rate.
A drawdown lifetime mortgage has the same advantages and disadvantages as a regular lifetime mortgage, as well as a few more that are unique to this kind of equity release scheme.
The main difference with a drawdown scheme is that you don't request the full sum of money available to you immediately. Instead, you decide on a maximum amount of equity you want to release and 'drawdown' the cash in stages when you want to.
Advantages of a drawdown lifetime mortgage
- You can drawdown cash by making withdrawals as and when you need them, or you may be able to request a monthly income
- You only pay interest on the amount of equity released, so interest could accumulate more slowly than with a regular lifetime mortgage
- You are in control of your money as you can release cash when it suits you
- You retain full ownership of your home
- Drawdown schemes may be available to younger people (aged 55+)
- Some drawdown schemes let you guarantee an inheritance for your family
- All equity release schemes are regulated by the Financial Services Authority, including drawdown schemes
Disadvantages of a drawdown lifetime mortgage
- Interest rates are usually higher on a drawdown scheme than they are on a standard lifetime mortgage
- If you want to increase the amount of equity released beyond the original amount agreed, you would normally have to apply for a further advance, which is not guaranteed
- There are restrictions on the minimum amount you can release
- The amount you can leave as an inheritance will be reduced
- The interest applied to the drawdown mortgage can grow quickly as it is compounded
- You can't usually raise as much money through equity release with a drawdown lifetime mortgage as you could with a reversion scheme, especially at younger ages
- If you repay the lifetime mortgage loan early, you may have to pay an early repayment charge.
Explanation of Different Rates
The Headline Rate - is the rate that the provider charges monthly.
The Annual Rate – is the Headline Rate annualised.
The APR - takes into account certain fees, charges and the amount of the loan over an estimated period.
If you would like more information call Key free on 0808 156 26 74 and speak to one of their specialists who will be happy to discuss your individual requirements.
If you are thinking about taking out an equity release scheme, there are points to consider which you should read through carefully.
