Equity release schemes offer property owners the opportunity to raise cash from the value of their homes, whilst still allowing them to remain living in the property.
Numerous schemes exist with various different options. Because the details can be complicated and a certain amount of risk may be involved, anybody considering equity release should take independent legal and financial advice before proceeding.
As a result of the current pensions situation in the UK, many retired people find themselves living in a property worth several hundred thousand pounds, but not having enough cash to live on. Although there are other reasons for considering equity release, (e.g. funding home improvements or reducing inheritance tax liabilities), releasing cash from a property as a source of income is tempting for an increasing number of people.
When Which Magazine investigated equity release schemes, its findings did not make pleasant reading. Its conclusions were that many equity release schemes were expensive, inflexible and risky. Although, financial institutions disputed Which's findings, it was clear that in many cases interest rates charged for equity release mortgages compared unfavourably with conventional mortgages. Similar observations have also been made by the Financial Services Authority (FSA).
Equity release schemes can be divided into four broad categories:
- Home income plan: property is mortgaged and the cash raised is used to purchase an annuity;
- Interest only mortgage: property is mortgaged and the owner takes cash sum and makes interest payments, with capital being repaid at a future date;
- Lifetime mortgage: property is mortgaged and interest is added to the balance owing, which is paid off when the owner dies and the property is sold;
- Home reversion scheme: property (or share of a property) is sold to a financial institution in exchange for a lump sum or monthly income.
The individual property owner's circumstances should dictate the choice of equity release scheme. However, equity release schemes are not appropriate for all homeowners.