Equity Release Mortgages allow you to release some of the equity in your home without having to sell your property or move out. These schemes are usually more directed at older homeowners, who are, in a majority of cases, less likely to be able to afford monthly repayments due to their lower income.
There are two types of Equity Release Schemes, Lifetime Mortgages and Reversion Schemes; the difference between the two is explained below.
Lifetime Mortgages appear to be the more commonly used scheme. By taking out this kind or mortgage, the borrower is granted a lump sum, or an income (or both) by the lender but has the benefit of retaining the legal title and all other rights in the property. There are no monthly repayments. Instead, the loan is paid back to the lender either when the house is sold, the borrower dies, or the borrower goes into care.
There is, of course, interest to be accounted for. As payments are not made on a monthly basis interest is not paid either. Instead, the interest is compounded and is payable with the loan once the loan becomes payable. The effect of this is that it swiftly increases the amount owed by the borrower
The most popular type of Lifetime Mortgage is the ‘drawdown’ version. This version prevents the borrower from being left paying a high rate of interest, and can usually save the borrower a great deal of money. Rather than being granted a lump sum outright, a sum of money is taken from the equity and put to one side. The borrower can draw from this pot as and when they need to and the effect of this is that the borrower will only pay interest on money actually drawn, rather than on the whole lump sum which has been put aside.
This type of equity release is a lot less common. Like with a Lifetime Mortgage, the borrower is granted a lump sum or a regular income. The disadvantage to this scheme is that the borrower has to sell part or the entirety of their home to a company in order to be granted this lump sum or source of income. The borrower does retain the right to live in the property, but when the house is eventually sold, the borrower, or their estate will only be entitled to the receive the percentage of the property’s value that they still own. By way of example, if a borrower sells 90% of their house to a company in return for a lump sum, in the event of a sale that borrower will only receive 10% of the sale proceeds.
It is important that you take independent financial advice from a specialist Equity release financial advisor before entering into such a scheme and we can recommend advisors to you. Having taken advice we can advise you on the legal side of the transaction and deal with the providers lawyers on your behalf.
If you have a query or would like to book an appointment please get in touch with our First Contact team on 01256 320555 or email email@example.com.
Head of Residential Property