As you grow older and start to look at your finances you may want to equity release (money) from the value of your home, as an additional cash lump sum, instalments for income or both. To do this you would join an equity release scheme. To qualify you usually have to be over a particular age (usually 50), you can continue to live in the property and will be responsible for maintaining your home. Funds are usually offered as a cash sum, regular income or both. There are two main types of release equity schemes – Lifetime Mortgages and Home Reversions. Lifetime mortgages involve you taking out a secured loan against your home which provides funds for you but has to get repaid. The mortgage gets repaid from the sale of your home when you die, or if you move (e.g. to sheltered accommodation). Lifetime mortgages are usually available as Roll-up Mortgage or Drawdown Mortgage.
Roll-up mortgages offers regular income or cash lump sum and is fixed or variable interest is added to the loan monthly or annually. This interest is not paid until your home is sold and since the interest is charged on the loan and also on the interest accruing, the amount owing can grow quickly.
There is a choice of Interest-only or Fixed repayment mortgage. Drawdown mortgage involves just taking small amounts of cash over time (no lump sums). Because you are taking smaller amounts over time the amount you owe should increase more slowly. Home income plans can be used when the lump sum is used to buy an annuity that gives you a regular income, usually fixed for life Shared appreciation mortgage (SAM) include a shared appreciation element. This means you agree with the lender that they can have a share in any increase in the value of your home when it is sold in return for them charging you less or no interest on the loanHome reversions enable you to release equity by selling or all of your home to a reversion company (or an individual). You get the sale proceeds as a cash lump sum, an income, or both.
You no longer own the home, but become a tenant of that company and may or may not pay token rent. The home gets sold when you move out of it or die. You get the sale proceeds as a cash. You can invest the lump sum yourself as another way of providing an income. You will normally be paid less than the full market value of your home – typically between 20% and 60% – because the buyer cannot re-sell the property until you die or until you move out (perhaps into a care home). The older you are when you start the scheme, the higher is the percentage you’ll get. The minimum age for these schemes is usually higher than for lifetime mortgages. You also usually get a lease giving you the right to carry on living in the home for the rest of your life (or until you no longer need it). You should check the terms of the lease to make sure you understand what you have to do. It’s worth asking yourself or an adviser a few things, including how the money from the equity release affects your tax position, any state benefits or pensions, the fees (arrangement fees, valuation fees, solicitor fees etc), does it offer a no-negative-equity guarantee’. This is a promise that your beneficiaries will never have to repay more than the value of your property. Make sure you only deal with FSA-regulated firms who must only recommend schemes that are suitable for you and take into consideration your needs and circumstances.
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