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What is Equity Release?
Put simply, equity release is a method for releasing some of the money stored up in your home, without the need to move.
How much equity you can release depends on how old you are, the youngest applicant must be at least age 55, and how much your home is worth.
What can you use Equity Release for?
You can use the tax-free cash release to spend as you like. Here are some of the equity release solutions and things people use the money for:
- Improve your lifestyle or standard of living
- Pay off your mortgage or other debts
- Make some home improvements
- Buy a new car
- Pay for a dream holiday
- Help your family
Equity release schemes enable homeowners – usually of 55 years of age or more – to use the value of their home to raise cash but without having to move out of it. The two main types of equity release schemes are i) Lifetime Mortgages and ii) Home Reversions. The cash released can be taken as a lump sum or sometimes in the form of a regular income, or both, to be used exactly as the homeowner/homeowners wishes. As the homeowners continue to live in their home, they continue to be responsible for maintaining it. Irrespective of the scheme utilised, it is only when the homeowner (or homeowners) die, or are admitted to care, that properties can be sold.
Lifetime mortgage schemes
The main types are:
Having taken out the loan – and although a fixed or variable rate of interest is added to it monthly or annually – the homeowner pays no interest at all until the home is sold.
Rather than taking the loan as a single lump sum at the start, the homeowner takes smaller amounts, either at regular intervals or as and when needed. In common with a Roll-up mortgage a fixed or variable rate of interest is applied monthly or annually and the homeowner pays no interest at all until the home is sold. But by drawing down funds on a gradual basis, a drawdown mortgage may ultimately cost less than a Roll-up mortgage.
The homeowner takes a cash lump sum and pays either a fixed or variable rate of interest on the loan each month. The amount originally borrowed is repaid when the home is sold.
Fixed repayment mortgage
The homeowner borrows a lump sum from a lender and rather than paying interest on the loan, the homeowner agrees instead to repay a higher sum than they originally borrowed when the home is eventually sold. The actual amount to be repaid at that point is agreed with the lender at the outset of the arrangement.
Home income plan
The loan is used to buy an annuity which provides the homeowner with a regular and fixed income for life, out of which the homeowner pays the interest on the loan and spends the balance as they choose. The loan is repaid when the home is sold.
Shared appreciation mortgage (SAM): some lifetime mortgages provide a shared appreciation element, where any increase in the value of the home which materialises when it is sold is shared with the lender in return for the homeowner paying less, or no interest at all, on the loan.
Home reversion schemes
On the understanding that the homeowner can live in their home rent free – or almost rent free – for the rest of their life, the homeowner sells the property (or a share of it) to a home reversion company. The homeowner will not normally be paid the full market value of the property because the home reversion company has to wait until the homeowner or their spouse dies or goes into care before they can sell the property. If only part of the home is sold, the homeowner will benefit from any rise in the value of the share of the property they own.
There are, of course, advantages and disadvantages of both types.
Additional Equity Release resource can be found here http://en.wikipedia.org/wiki/Equity_release