Criteria for an equity release scheme

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by: Regina Falangy
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Word Count: 532
Date: Mon, 27 Dec 2010 Time: 12:11 AM

If you are aged 55-95 and a homeowner in the UK then you may be entitled to release cash locked up in your home to spend in any way you wish through an equity release scheme.

Equity release is commonly used to help people fund things they want out of life with home improvements being a very popular option, followed closely by holiday and travel and simply as a way to relieve the stresses and strains on personal finances.

If equity release is something that you are considering, it is highly important that you seek professional equity release advice from an independent adviser first. Equity release is in fact a big financial decision that shouldn’t be taken lightly and you should be fully aware of what is available to you before you make any commitments.

There are three main types of equity release schemes: lifetime mortgages, drawdown lifetime mortgages and home reversion plans.

Lifetime Mortgages are the most popular type of equity release scheme. This type of plan allows you to borrow money from the provider and the loan secured against your home. You can continue to live there and will remain the legal owner. You don’t have to meet any monthly repayments and the interest rate, which is usually a fixed rate, being repaid when the property is sold, usually when you die or move into long term care. If you opt for a joint plan with your partner, your home is only sold when he or she goes into long term care or dies.

Drawdown Lifetime Mortgages offer a customer more flexibility for those looking to release money from their homes. Rather than take out a lump sum up front when you start the scheme, you agree a total loan amount with the lender but take the cash as and when you need it. After the initial loan amount, there is usually a minimum instalment you have to take, typically £2,000-£5,000. The advantage of this arrangement is that you pay interest only on the money you take rather than the whole lump sum. It also means that if you go back and borrow extra cash if you need it you don’t have to pay all the costs involved a second time round, which does happen with some plans. Even if your house falls in value most providers allow you to still borrow the amount agreed at the start.

Home Reversion Plans are another option available to you. This type of plan allows you to sell all or part of your home to a reversion company in return for a cash lump sum or income. When the plan ends, which is usually when you die or move into long term care, the reversion company sells the property, takes its cut and pays what is left, provided you didn’t sell 100 per cent, to your estate. Until then you can live in your home rent-free. You will not receive the full market value of the property for the part that you sell as you don’t pay any rent during the whole time you live there.

About the Author

Rachael Niklas is the author of this article on Equity Release. Find more information about Equity Release Calculator here.

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