How do They Work?

Equity release schemes can represent efficient methods to tap into the liquid value of your home.  They are often used by older individuals or households who cannot afford the stipulations associated with standard mortgages due to payment problems.  If you are considering such an option, it is a good idea to understand the basic mechanics as well as what options are at your disposal.

The Theory Behind a Typical Equity Release Package

Let's imagine for a moment that you are near, at or over the age of retirement.  You cannot take a regular mortgage due to the fact that you have little available income.  In this situation, an equity release programme could very well represent the most logical choice.  There are two main options to choose from and each of these is associated with its own set of stipulations.  Let us now examine each in greater detail.

Lifetime Mortgages

These are by far the most common type of an equity release scheme.  Lifetime mortgages allow you to obtain a lump sum that is equivalent to the value of your property.  However, you can also choose to have this amount distributed in the form of incremental payments (or a combination of the two).  The good news is that the ownership of the property will not change hands...it is still yours.  In most cases, you will not be required to make any type of repayment until your death or in the event that you are placed into an assisted living facility.

However, there is a trade-off here.  As you are not obligated to make any payments, the associated interest will accumulate over time.  This signifies that you will ultimately have to pay back significantly more than was originally borrowed.  This is why a variant known as a “draw-down” plan is offered.  You are provided with a lump sum and you will only withdraw the funds as they are necessary.  This can help to limit the amount that needs to be repaid.

Home Reversions

This is another option to consider.  In this instance, you will sell a certain percentage of your home to a financial entity.  In return, you will receive a lump sum or a regular income.  However, you sill retain the right to live in the property.  Assuming that the home is eventually sold., you will receive a value equivalent to the percentage that remains in your name.  You will be required to pay a fee to set up this scheme and the cost will vary in relation to the financial firm.  The main drawback is that the funds provided to you in the event of a sale could not be sufficient in order to make ends meet in the future.

Both of these equity release plans are viable options to consider.  Each is associated with its own merits as well as possible pitfalls.  Please feel free to perform additional research to ascertain which framework could represent the most viable choice.