Equity Release Mortgages

Home Income Equity Release

With a home income plan, the property owner mortgages their home and uses the cash raised to purchase an annuity to provide an income for life. Mortgage interest payments are deducted from the income, but the capital sum is not usually repaid to the mortgage provider until the property has been sold, after the death of the property owner.

Advantages of Equity Release Schemes
The property owner is guaranteed a monthly income for life, with mortgage interest payments being made from this monthly income;
The mortgage sum owing is constant so that any increase in value of the property benefits the property owner or their heirs.

Disadvantages of Equity Release Schemes
The income generated is fixed and its real value will be reduced over time by the effects of inflation.
Rates for annuities incorporated into home income plans are not usually very competitive; other schemes giving more investment flexibility offer potentially better returns.
Equity release is not generally the best method to raise a cash lump sum.

Because annuity rates have fallen significantly, in recent years, the previous popularity of home income plans and other schemes involving annuities has diminished considerably.

Interest Only
The property owner takes out a mortgage on their home to raise a cash sum, which can be spent as desired and makes monthly repayments of mortgage interest. The capital sum borrowed is repaid to the mortgage provider when the property is sold at a future date.

Advantages of Interest Only
The mortgage balance owed is constant, so that any increase in the value of the property benefits the property owner or their heirs.
If a property owner chooses a fixed rate mortgage deal, the exact cost of their mortgage repayments will be known, which facilitates easier budgeting.

Disadvantages of Interest Only
A property owner needs to ensure that mortgage repayments can be covered comfortably from income, so investment decisions regarding the capital sum released should be considered carefully.
Because annuity rates are low at present, they do not generate adequate returns for most people, so alternative investments should be contemplated.
If a property owner chooses a variable rate mortgage deal, they risk a cut in net income if interest rates rise.

Summary
Cash raised using a home income plan is normally used to purchase an annuity;
a home income plan guarantees a monthly income for the life of the property owner;
an interest only mortgage is an effective way of raising a cash lump sum;
with an interest only mortgage, any increase in the value of the property benefits the owner of their heirs.