Equity Release

Releasing some cash from your home with equity release

If you are an older homeowner (from 55-60 years upwards) who is looking for a cash injection in to their lives, then you may wish to consider an equity release scheme. Equity release schemes can often enable a mature homeowner who has little or no mortgage left on their home to release cash, which is tax free, from their home.

This may be in the form of a one off payment or as a regular income or as a combination of both.

What can I use the money for?

Once the cash has been released, you can use the money how you wish, typically subject to you clearing any outstanding balance on your mortgage first. Examples of how equity release schemes may be used are:

• To pay off any unsecured debt you have (eg loans, credit cards etc);
• To have a long, once in a lifetime, holiday;
• To carry out home improvements;
• To provide extra cash to make your day to day living more financially comfortable etc.

Typically, there are two forms of equity release scheme which are home reversions and lifetime mortgages. In simple terms:

• The lifetime mortgage is a secured loan on your home. You continue to live there and the loan will be repaid when you die or if you move out (such as going in to care);
• A home reversion equity release loan allows you to sell part or all of your house. You can then stay on there as a tenant until you die or if you move out.

Some of these cash release schemes will require a monthly interest payment from you, but not all of them. And terms and conditions – as well as any interest rates where payable – can vary. This means that it is important that you thoroughly research all your options and take independent financial advice if you feel you need it.

Also, you should note that different providers have different lending criteria. Whereas some will lend to homeowners aged 55 upwards others may ask that you are 60+ before they will consider you. The value of your home; the equity within it; your general state of health; plus many other things; are all taken in to consideration when a lender looks at an equity release scheme or a lifetime mortgage.

How to compare equity release schemes

If you are considering raising money using the equity in your property then you'll want to compare equity release schemes that are available to you. With this in mind, the list below outlines a few of the factors to consider before making a final decision.

One of the main factors that people use to compare equity release schemes is the method by which interest on the loan is paid. The two most popular lifetime mortgages roll the interest in with the loan amount and the total is paid when your property is sold. This means that you don't have to make any form on payment for the remainder of your lifetime. Home income plans and interest-only mortgages on the other hand do require you to pay the interest on the loan each month. The benefit here though is that the lender only takes the value of the initial loan from the proceeds of the sale of your property.

Choosing a home reversion scheme doesn't involve any interest payments at all, either while living or after your death. This is because you sell you home to the reversion company rather than borrow money from them.

Another way to compare equity release schemes is by looking at the amount of equity you are allowed to release. Lifetime mortgages generally allow you to borrow up to 50% of the value of your home. The actual amount will depend on your individual circumstances and will differ from lender to lender. Home reversion schemes on the other hand allow you to sell anything from 20% to 100% of your property. Saying this, it is rare that you will receive more than 60% of the property's market value regardless of how much you sell to the reversion company.

Most equity release companies give you the option of receiving the money you borrow as a lump sum or as a monthly income, however some don't. If you require one or the other then you'll need to compare equity release schemes according to this factor first and then consider the other factors to find the best scheme for you.

These are just three of the possible ways to compare equity release schemes and you can probably think of more. An independent equity release advisor will be able to provide you with additional details of each type of scheme, and it is often worth consulting one to get a thorough comparison done.

The options available for lifetime mortgages

Lifetime mortgages are a popular form of equity release. They allow you to borrow a lump sum, generate a monthly income or do both using the equity within your property. There are four main types available, each of which has its own benefits and drawbacks.

This type of lifetime mortgage furnishes you with a percentage of your property's worth which you aren't required to pay back while you're still alive. You don't even have to pay the interest on the loan. Any interest accrued is added to the value of the loan and the total amount is taken from the proceeds of the sale of your property following your death.

While this type of equity release can provide you with up to 50% of your property's value as a lump sum, it is worth mentioning that the interest charged on the loan can be quite high. This means that if the lifetime mortgage runs for a good number of years, the interest payable can easily double the amount you originally borrowed.

This type of equity release works in the same way as roll-up mortgages with regards to interest charges and repayment. The main difference between the two is that draw-down mortgages agree to a maximum amount that can be borrowed and this amount is &aposdrawn-down' at intervals, as and when it is needed.

So for example, you may be approved for a draw-down mortgage of £40,000. At the time you sign the contract you might only need £5000 and so that much is released from the equity fund. Then, say a year later, you might want another £5000 and so on up to the maximum amount. A similar roll-up mortgage may also allow you to borrow £40,000 but in this case the money is taken as a lump sum.

These forms of lifetime mortgage again allow you to borrow a lump sum against the value of your home but here you pay the interest payments on the outstanding loan each month. The main benefit of these types of equity release is that the size of the initial loan never increases and you know exactly how much needs to be paid back after your death. The capital is repaid when your property is sold.

These two forms of lifetime mortgages aren't as popular as the first two because they require you to make payments each month for the duration of the loan. They are options worth considering though and it might be worth consulting a professional equity release company to get further details.