It is only normal for people to want an adequate income to support themselves in financially uncertain times, such as the present.
Unfortunately, not everyone can get access to this income easily, especially homeowners who have retired. Having been on employed income for most of one’s life & then seeing a drop in income can be daunting. The good news is that the FSA has permitted ways for homeowners who have retired to gain additional income or capital lump sums through the equity in their homes.
The result of this is equity release, where homeowners over 55 years of age can gain income from the value of their homes.
There are different equity release schemes from which homeowners can choose depending on their preferences. Here are some of the schemes offered to homeowners through equity release.
Lifetime mortgage – This equity release scheme involves arranging monthly income or getting a lump sum from the equity of your home. Once the equity has been released. there are NO monthly repayments to make with these type of plans. The interest is instead rolled-up & added to the balance on a yearly basis, escalating to the extend of roughly doubling the balance every 10-11 years.
Home equity release therefore has the effect of reducing your beneficiaries inheritance & as a consequence it is always advisable to involve your children in the equity release process & decision making.
At the end of the term of the mortgage term, which will once the second person has died or gone into long term care, the lender can use their calculator to ascertain the redemption figure. The loan is then repaid once the property has been sold which most equity release UK companies will allow 6-12 months for this to happen. Therefore, even in today’s depressed property market there should be ample time for the property to be sold at the best price possible.
Depending on the equity release interest rate & how much was originally borrowed will determine the final balance to be repaid.
Home reversion – with this scheme, the reversion company will actually buy a share of a property. This can be anywhere upto 100% of the property value. In the meantime, a lifetime tenancy agreement is made which allows you to live rent free for the rest of your life. (This must NOT be confused with non-regulated sale & rent-back schemes which do not offer this feature). You make an agreement with the home reversion provider to keep the property in good condition for the duration of the term.
At the end of the day, (death or long term care) again the property will be sold. The amount the reversion company will require will be the percentage that was sold to them. Therefore, if 75% of the property value was sold to the reversion company, then 25% of the sale value will be retained by the homeowner. This has the major advantage over roll-up lifetime mortgage schemes in that your beneficiaries will know exactly what amount of the property value they are to receive.
Shared appreciation mortgage – There are some lifetime mortgage schemes that allowed homeowners to share the increase in home value. This can make a huge difference to the final outcome in a time of quickly increasing house prices. These plans are no longer sold & were withdrawn in the 90's. Such schemes do still exist are subject to review.
The worked by instead of charging interest for the loan, the bank could usually take anywhere up to 75% of any house price rises over the life of the mortgage. However, house prices escalated significantly over the next decade & meant that people who took out these plans ended up owing the banks hundreds of thousands of pounds.
Despite house prices falling over the past 18 months, the average house price has still risen by over 100% from the late 1990's, to date. This has left many elderly borrowers unfortunately marooned in their homes. The reason for this is that any reason for them selling the property, such as a move into residential care, would trigger a massive payout to the shared appreciation mortgage lender leaving people with no funds to move forward. Companies such as Barclays & Bank of Scotland were the main protagonists in this equity release arena.
Before entering into any equity release scheme, always seek independent financial advice.
Call freephone 0800 678 5159 to speak to one of the Equity Release Supermarket team.