Equity is what we call the difference of your home’s value and the amount still due on your loan. In simpler terms, equity is the accrued value in your house. Equity release is any way to access that accumulated value without having to move out.
Equity release plans are varied and it’s very likely to find one that meets each homeowner’s specific needs. The two most common equity release methods are Lifetime Mortgages and Home Reversion Plans.
Lifetime Mortgage
Just like a regular mortgage, a lifetime mortgage involves a loan, except in this case it’s intended to be paid back after the borrower dies or moves to a long term care facility, instead of a set monthly amount. Lifetime mortgages allow you to borrow money secured against your house without ceasing to own it. There are several options when initiating a lifetime mortgage:
+Flexible lifetime mortgage: a flexible LM is the only variant that allows the homeowner to pay back part of the loan before it’s due. Specific arrangements can be made for monthly payments, which can be canceled at any time at the homeowner’s discretion.
+Interest only lifetime mortgage: this type of lifetime mortgage allows the borrower to pay the interest charge in monthly installments, reducing the overall cost of the loan.
+Roll-up lifetime mortgage: a type of lifetime mortgage in which the money is disbursed in one lump sum payment rather than installments. The owner may choose how much equity to release, and interest is built on that specific amount,
+Drawdown lifetime mortgage: the drawdown LM option enables the homeowner to release the equity flexibly, meaning they have full control of how and when the money is disbursed. The funds can be held in a reserve account (that won’t build up any interest), allowing the owner to withdraw amounts as small or large as they want.
Home reversion plans
Home reversion plans are an equity release method that doesn’t involve a loan, and therefore poses no interest. These plans consist of selling all or part of your home to a company and receiving the proceeds in a tax-free lump sum and then staying in your home rent-free until you either pass away or move to a long term care facility. If you so desire you may choose to receive the proceeds in installments instead, but either way the selling price for HRP is usually way below market value; an assessment is made of the seller’s age and lifestyle, and the closer they (apparently) are to death the closer the proceeds are to the house’s market value.
- Pros
- Full control over proceeds and method of disbursement
- Ability to protect some of the home’s value to pass on to beneficiaries
- Rent-free residence for the rest of your life (or until special care is needed)
- Cons
- Selling your house for less than it’s true value
- Poor value in case of unexpected death
- Sole ownership of the home is given up
Bottom Line
Regardless of what type of plan you decide to use, it’s always beneficial to do it with a company endorsed by the Equity Release Council; they have a “no negative equity” guarantee, meaning you have certainty that your estate won’t end up owing more than your home’s value.
