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Schemes to unlock the capital tied up in residential property are becoming increasingly popular. As the population ages, homeowners are looking for a source of income in their later years. One way of doing this is to access the wealth that exists in the bricks and mortar of their homes.
Equity is the difference between the value of a property and the amount of debt, if any, that is secured on that property. Many older people will have paid off the loans used to purchase their homes, which means they can own an asset worth hundreds of thousands. But they cannot use that money to buy day-to-day essentials unless they either sell their home, or they enter into an equity release plan.
There are two basic ways to release equity – lifetime mortgage or home reversion. Both are complex financial transactions and it is recommended that home-owners take professional advice before entering any commitments.
Lifetime Mortgage Plans
As the name implies, a lifetime mortgage is a loan. The purpose of the loan is to provide the homeowner with an income, potentially for the rest of their life. The loan can be provided as either a lump sum payment or as regular income.
The loan is usually repaid when the property is sold, which may be after the death of the homeowner. The repayment will include both the capital that was paid out over the term of the loan, and the accumulated interest.
The interest figure could be substantial. On a lump sum loan of fifty thousand, at an interest rate of 5% per year, the total amount due after ten years will be over eighty thousand.
Home Reversion Plans
This is a different approach to equity release, but it offers similar benefits. Under a home reversion plan the home-owner sells some, or all, of their property to a finance company. This means that they give up legal title to their house, and they receive a lump sum of cash.
They can continue to live in the property until their death, or when they move into some sort of sheltered accommodation. Some reversion plans charge a small rent, but others are entirely rent free.
When the occupier dies, or leaves the property, the finance company will sell it. From the proceeds they will take what they need to cover the money they are owed. Any remaining balance is passed to original owner or their estate.
The main difference between the two types of plan is that with a lifetime mortgage the homeowner borrows money which has to be repaid, while with home reversion the home-owner becomes a tenant.
Equity Release Considerations
Anyone considering an equity release plan needs to give due consideration to a wide range of issues. There will be questions about what sort of inheritance is to be left to subsequent generations. Increasing the level of personal income through one of these schemes can reduce the amount of government benefits available to the homeowner. There might also be personal tax implications.
The market in equity release products is growing all of the time. Different providers offer different solutions. Some permit a level of portability, allowing homeowners to move house. Each will have their own scale of fees, and a different approach to the unexpected, such as the homeowner’s death shortly after the scheme was entered into.
For all of these reasons it is very important that a plan to release equity from a home is not entered into lightly, and that professional advice is sought where appropriate. However, equity release schemes are a useful addition to the finance options available to senior citizens.