Equity release is a way of releasing capital in your home (or other object with capital value) without you having to give up the use of it.
As is always the case with any form of borrowing (including
secured loans) the money will always have to be paid back. With equity release, this is normally done when you die. With this unusual form of repayment, equity release is normally suitable for elderly (or retired) people looking for some financial assistance.
There are several different kinds of equity release schemes available:
- Lifetime Mortgage: This is a loan, secured on your home, which is then used to generate an income. The interest that accumulates on the loan is added to the amount and is paid off at the same time as the capital. This is done either at death, or when the person moves out their home (could move into a retirement/care home for example). In this case the borrower will retain full legal title to the property.
- Interest Only: This is very similar to the lifetime mortgage, except that instead of the interest accruing on the capital of the loan, it is repaid as it occurs by the borrower in a similar way to a standard interest only remortgage.
- Home Reversion: This is where a borrower will sell all or part of their property to an individual or company. In return for this the borrower will get either a cash lump sum, or an increased income for life or a combination of the two. There is normally a condition placed on this form of equity release which ensures that the borrower can live in their home for as long as they wish.
- Shared Appreciation Mortgage: Here the amount borrowed is taken in return for a portion of the future increase in price of the property. Generally, the older the person, the less share will be required by the lender.
- Home Income Plan: This is again very similar to the lifetime mortgage however, instead of providing a lump sum, the money is used to buy an annuity which pays an income to the borrower.
Equity release has several advantages over a normal secured loan. For example it could be used to generate an income for life or even reduce the value of your estate, thereby reducing any inheritance tax which may be owed following death.
It also has a possible disadvantage in that any means tested income you are receiving could be reduced and also, the amount of money left in your estate at death will be reduced.
