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Releasing Equity from your Home
Equity release schemes have proved very popular in recent years. An expert explains what equity release involves and warns of the dangers
of releasing cash from property. Over the past decade returns on property have dwarfed those to be had from stock market investments and savings. Some people have
seen the value of their homes more than double since the mid 1990s. It is no surprise, therefore, that equity release has caught on.
Retired people are particularly attracted to using the rising value of their homes to boost their weekly income. There is now no
shortage of schemes on the market promising to help you do just that. But do they deliver?
The answer is they can but you will need to do some homework before investing. And a number of people will find home equity release
schemes, as they are called, are just not for them. The schemes differ but essentially most of them work by giving you a loan on the value of
your property. The deal is that you receive the loan as cash, usually on a monthly basis, but sometimes as a lump sum, and continue to live in
your home. Then the company that loans you the money will recover it either by selling your property after your death or if you sell your
property - for example to move into a care home.
What Types of Equity Release are Available?
There are three main categories of equity release, and within each of these are numerous different plans.
Lifetime mortgages
This is where you release a lump sum of equity from the value of your property. The amount you release is tax free, and can be spent on anything
you choose. There are no regular repayments to make as the amount that you have released, plus any interest accrued, is repaid from the proceeds of property once it is sold.
Generally, this is when you pass away or go into long-term care.
There are numerous different lifetime mortgages. Key variations come in the interest rate; the percentage of your property’s value that you are
able to release (otherwise known as the loan to value or LTV); and how flexible the scheme would be should you wish to move home. This is a
lifetime mortgage.
Drawdown lifetime mortgage
As with a standard lifetime mortgage, the drawdown equivalent allows you to free up tax-free money that is tied up in your home, which can then be
spent on whatever you choose. There are no regular repayments to make and you continue to own 100% of your home.
With a drawdown lifetime mortgage, however, you can access this money more flexibly. Rather than just receiving a lump sum, you
have the option to release your cash over time, as and when you need it. This means that you can accrue a reduced amount of
interest and also limit or prevent any impact that the additional funds may have on meanstested state benefits, should
you currently receive any. The total amount that you have borrowed, plus any interest accrued, is only repaid once you pass away or move into long-term care.
Drawdown lifetime mortgages will often be offered at a slightly higher interest rate, to reflect the added convenience that they offer. This is a
lifetime mortgage.
Home reversion scheme
With a home reversion scheme, you exchange the ownership of some or all of your home for a lump sum of cash, and the right to remain in
the property, free of charge, for as long as you live (also known as a lifetime lease). Because you are able to continue living in your home, rentfree,
for life, you would generally receive a fee for your property that is lower than it’s market value.
An advantage of a reversion scheme is that you can choose to surrender only a proportion of your house, thereby guaranteeing that the rest will remain in
your estate to pass on to loved ones after your death. Reversion schemes are not currently as popular as lifetime mortgages, however, as, although a greater
lump sum can generally be released, many people prefer to retain full ownership of their properties.
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