Equity Release in the UK Property Market

Equity release allows homeowners to benefit from the equity tied up in their property. The money that is raised can be withdrawn to suit the homeowner’s requirements and can either be taken as a lump sum or it can be made in flexible withdrawals. It allows older homeowners to tap into the value of their property without the need to sell up.

It is important to compare equity release schemes as they come in two distinct forms:

Lifetime Mortgage and Home Reversion Schemes.
The Lifetime Mortgage allows homeowners to take out a loan on their property in return for an upfront payment. The homeowner continues to own the property they are releasing equity on.  Under this equity release scheme, the borrower will simply pay the interest that accrues on the loan and this is done on a monthly basis or as determined by the loan provider.

Home reversion schemes form a relatively lower percentage of the industry. Under this form of equity release scheme, the homeowner will sell all or part of their house/property or a certain percentage of it to a bank or a financial loan provider; when this transaction is done, they can still reside in the property. When the property is ultimately sold the homeowner and their estate will only get the percentage of the property’s worth that is remaining. If, for example, you have sold 70%, you only keep 30% of the final sale price.

For the lifetime mortgage, there are different plans which include Drawdown Plans, Enhanced Plans, protected equity plans and Interest only lifetime mortgage repayment plans. Compare equity release schemes like roll-up lifetime mortgage schemes for their advantages:
•    No monthly payments
•    Maintaining full ownership of the property
•    Benefiting from increased value
•    Choice in repaying the loan or selling the home for repayment
•    Age one can take advantage of this scheme is 55 versus 65 for most other equity release plans

The downfalls include an early repayment charge and it reduces the inheritance the homeowner is able to leave after their demise. The early repayment charge is only enforced if the homeowner wishes to pay off the equity plan early. Taking the roll-up scheme early can lead to trouble later when money has been spent, but there is no further equity to take out.

Drawdown Plans and their Advantages
Drawdown plans are similar to the roll-up lifetime mortgage. There are a couple of additional benefits to this type of plan:
•    You create a maximum amount you can draw on but you only take what you need. In this way you know there are further funds available to you if you need them.
•    You only incur interest on this plan for the money you take out of the equity account instead of the full mortgage amount or equity in your property.
•    It is possible to take as many withdrawals as you wish up to the limit you have set.

Drawdown plans limit you to a smaller sum than the lump sum withdrawal. It does not matter what your age is or the property value in terms of the slightly reduced withdrawal amount versus the lump sum option. Typically, you are held to a 10 year agreement for the limit set on your mortgage. At the end of 10 years you will need to get your home re-valued then the facility can be increased.

Interest-only Mortgage
An interest-only mortgage is different from the roll-up lifetime mortgage because you can make monthly payments during the scheme. The monthly payment is on interest instead of the principle balance. You do need to have the funds to pay the interest or this concept will not work. The idea is that you have equity in your home for future use, while making certain your debt does not grow.

The advantages of the Home Reversion Scheme are cash released can be spent as the homeowner wishes, it guarantees inheritance, and can typically raise a larger sum of money. The drawbacks are that the amount the homeowner is able to leave as inheritance is reduced and the fact that Home Reversion plans cannot be reversed if 100% is sold to the home reversion provider.

While it is possible to leave behind some inheritance, the amount left is smaller than it would otherwise be if the home was sold without an equity release tied to it. Equity release plans are available in varied form to fit homeowners’ needs in their advanced years, but each has specific advantages and disadvantages to assess first, thus you need to compare equity release schemes.