For many people their wealth may be tied up in a property that has appreciated in value substantially, but often their income from pensions or other investments have not grown in the same way, or may have even fallen in value. For many people there is a desire to turn the value in their property into a lump sum, an income stream or even both; in these cases Equity Release may be the answer.
Before we discuss the various types of Equity Release schemes that may be available to you, we take the opportunity to urge you to take independent financial advice as to whether any of the schemes are suitable for you. The process has received bad press in the past and can be legally and financially complex, whilst Burtons can undertake the necessary legal work for you, we cannot advise you as to whether a particular scheme is suitable for your financial position.
Please read on to find out more and if Equity Release is of interest to you then please consider taking advice from an independent financial adviser with experience in the field before proceeding further.
Basics
Usually there are eligibility issues, some of which will be down to each individual financial provider, however some of the basics are that you will usually have to be over 55 years of age, own your own home, that home will need to have a minimum value and will usually need to be of a traditional construct; for example if you live in a park home then you are unlikely to be able to obtain an Equity Release.
There are other factors for the financial provider to consider, some of which include whether to nor the property is a freehold or leasehold title (freehold tends to be preferred), any existing mortgage on the property and there will be a minimum and maximum amount that can be borrowed (or sold). This is where your independent financial adviser will be able to provide further information.
Schemes
Whilst often going by different names, there are essentially three schemes available:
- lifetime mortgage
- home reversion plans
- sale and rent back
We shall summarise each in turn:
Lifetime Mortgage
In its simplest form this is a mortgage that is usually repayable when the applicant dies, goes into long-term care or leaves the house. The applicant borrows against the value of the house to produce a lump sum that they can then utilise as they wish. There are some variations of this scheme and new products in relation to this become available all the time as others are withdrawn from market; you should discuss what may be available with your independent financial adviser.
Some types of this product are known as:
- Roll-up Loans
- Flexible Drawdown Mortgages
- Flexible Payment Mortgages
- Fixed Charge Mortgages
- Home Income Plans
Home Reversion Plans
These schemes tend to involve the applicant selling a percentage of their house to the loan provider, they receive either a lump sum or an income in return together with the right to live in the property as a tenant paying a nominal amount of rent. When the property is sold, the loan provider takes their percentage share of the proceeds of sale, which includes a proportionate part of any increase in value since the loan was provided.
The amount you can borrow under this scheme will depend on age, the value of the house and the loan providers individual qualification factors. The two main outcomes for this are either a lump sum of money or an income.
Sale and Rent Back
These types of schemes are not true Equity Release and are aimed more at the market of people who are in danger of losing their home, these are the schemes that received so much bad press previously but can still be of use. Under these schemes the loan provider purchases the property from the applicant at a large discount and then the property is rented back to the applicant at market rent. The money released is then available for the applicant to use in settling any outstanding mortgage on the property.
Some schemes allow for a buy back of the property at a later date.
One of the dangers with this scheme for the applicant is that they will only occupy the property as a tenant and have little security. After six months they could be required to leave the property or they could find themselves in danger of not being able to afford the rent; which is often greater than their original mortgage amount.
Advantages and Disadvantages
All schemes carry advantages and disadvantages and it will be up to the applicant to decide whether any scheme is suitable for them. Taking out Equity Release can be a big decision and we again reiterate that you should obtain independent financial advice as to whether a scheme is suitable for you before undertaking the process.
If you would like to know about the legal process involved in Equity Release or are considering undertaking the same and would like a quote or to instruct us, then please contact our Equity Release Team on 01892 824 577 or on pembury@burtons-solicitors.com.
