In recent years, lower interest and annuity rates have reduced the income of many retired homeowners and, as such, property prices have increased and many people find themselves ‘property rich and cash poor’.
On paper, homeowners are wealthier than they have ever been, but because their wealth is tied up in their main residence, it cannot be used to help with living expenses or pay for those occasional treats and luxuries they were hoping to enjoy in retirement.
Whilst moving down the property ladder is a choice that suits many, those who wish to remain in their existing home can access some of the equity in their property by using an equity release scheme.
Types of schemes
There are two main types of equity release scheme. One involves taking out a lifetime mortgage against the value of the property. The other, known as a reversion scheme, involves selling all or part of the property to an investment company, whilst allowing the owners to live in their home rent free for the rest of their lives. In either case, occupancy can continue until the owner dies or moves into long-term care.
Lifetime mortgage
A lifetime mortgage is a special type of loan that is designed to run for the rest of the borrower’s life. Funds are borrowed against the value of the property and taken in the form of a lump sum and/or a regular income. Currently, there are two types: interest-only or rolled-up interest. The former is for those who can afford to pay interest monthly but require capital for a particular purpose, whilst the latter is for those who cannot afford or do not wish to pay the interest, which is rolled-up into the debt and paid on death or when moving into long-term care. The interest rate is fixed at the outset and guaranteed for the life of the facility.
Reversion scheme
With a reversion scheme, all or part of the property is sold for usually between 20% and 50% of its current value, depending on the age of the owners. In return, the reversion company provides an income or a lump sum and a guarantee that the owners can stay in the property completely rent free for as long as they live or until the property is sold.
If you are considering equity release, it is wise to take advice on whether this approach is appropriate, which form is best for you and the impact of any means-tested benefits you might receive.
Our mortgage advisers are experts and can advise on the legal and financial steps involved in setting up an equity release.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
