2 Ways of Equity Release

This Key Equity Release Points Explained Post gives an introduction to the concept including an overview of Lifetime Mortgages and Home Reversion Plans with benefits and drawbacks.

But before we look at Equity Release let's define Equity 

Equity is defined as the difference between the value of a property and any loans secured against it.

So, if a property is valued at £250,000 and there is an outstanding Mortgage debt of £100,000 (The Banks'  Bit) , then the equity (Your Bit ) is £150,000. Note that if there are any additional charges on your property from creditors, then they will reduce the equity accordingly.

In simple terms, Equity Release allows homeowners to release the  Equity from their property. This can be done either in a tax free lump sum or in stages, while still remaining in their home. 

Often without having to make any monthly payments.

There are two main types of equity release products available.

1. Lifetime Mortgage

Just like an ordinary Interest Only mortgage where you still own your home. It simply has a mortgage on it.

A tax free cash lump sum amount is available dependant on the homeowner's age and the value of the property.

It can also be taken in stages known as Draw-down.

Lifetime Mortgages are made on an Interest Only basis where no repayment of the capital amount borrowed is required.

The Interest is charged on the amount drawn down and is generally at a FIXED rate and remains in place for the lifetime of the mortgage.

The homeowner can choose to make no payment at all and allow the interest to 'roll up'  into the loan as Compound Interest.

The original loan plus the 'rolled up'  interest being repaid to the Mortgage company when the borrower moves home, goes into permanent care or dies.

The property would generally be sold  with the proceeds paying off the mortgage and the remainder going to the homeowner or their estate.

It is possible for a borrower to make full or partial interest payments to reduce the effects of the interest roll up but can decide at any time to stop payment and allow the interest to 'roll up' for the remaining lifetime of the mortgage.

Here are some potential Benefits and Drawbacks of a typical Lifetime Mortgage.

      5 Benefits of Lifetime Mortgage

• The borrower retains ownership of the property.
• The tax free cash raised can be used as the borrower wishes.
• Many plans require no monthly payments to be made.
• The borrower is guaranteed lifetime occupancy.
• There may be some equity in the property when it is sold in the event of the owner moving, going into care or dying. The equity is then available to the owner or their beneficiaries.

      5 Drawbacks of Lifetime Mortgage

• The amount raised will be a relatively low proportion of the property value. This is particularly so for younger borrowers.
• The debt may roll up quickly and erode the equity, particularly when interest rates are higher than the annual property growth. This may affect the eventual legacy.
• Younger borrower's increased life expectancy is likely to lead to a higher level of rolled up interest.
• The borrower has no control over the roll up of the Compound Interest.
• Income resulting from a lifetime mortgage may affect the borrowers right to state benefits.

2. Home Reversion Plan

At present, there are very few Home Reversion Plan providers available.

 In 2019, Home Reversion plans accounted for less than 1% of the Equity Release market in the UK.

However, I will explain the concept, but will not refer to it again.

With this type of plan, the homeowner sells part or all of the property to a Home Reversion provider in exchange for a cash lump sale or an income.

 The Home Reversion Plan provider becomes the legal owner of the property with the former owner retaining a beneficial ownership with their interest protected by the establishment of a lifetime lease.

This Lifetime lease will guarantee them occupancy of their former home for life. There are no monthly payments to meet.

When the former owner dies or moves into residential care, the provider sells the property  paying over any equity that was retained if it had been a partial reversion where the provider had purchased a certain percentage of the property. This amount would be available to the former owner or their beneficiaries. Of course if the planholder had sold 100% initially there would be no payment.

5 Benefits of Home Reversion Plan

• The cash raised can be used as the planholder wishes.
• Larger sums may be available compared to Lifetime Mortgages.
• No monthly payments are required.
• The former owner is guaranteed lifetime occupancy.
• The future position is certain as there is no rolled-up interest.Who owns what. and how much, is set out at the start of the contract.

5 Drawbacks of Home Reversion Plan

• The planholder loses ownership of the property or part of it.
• The planholder loses the right to any future growth in the part of the property sold.
• The cash or income raised will not represent the true value of the part of the property sold.
• If the planholder dies soon after signing up to a Home Reversion plan, they will have lost a significant asset in return for little benefit.
• Increases in income resulting from a Home Reversion plan may affect the planholder's rights to state benefits.

WATCH MY VIDEO EXPLAINING EQUITY RELEASE

Visit My Website For More Information on Equity Release

Got a question?, then please call me on

 01375 676578

 leave a message and I'll call you back

OR contact me using the message box in the Contact section 

Pat Cunningham  CeMAP,  CeRER