What are the Different Types of Equity Release Schemes?

An equity release mortgage can be a real bonus for many people who want to make their retired lives more comfortable and financially secure, while keeping all their assets in their possession. Equity release schemes allow you to release or free-up some of the value of your property while continuing to live in it.

There are two main types of equity release schemes, and within these schemes there are a number of different policies and options designed to suit different people. The two main types of equity release are lifetime mortgage plans and home reversion plans.
The basic difference between lifetime mortgage and home reversion plans is that in one the payment received is a loan and a mortgage is set up against it; and in the other, the payment goes towards purchasing a part of the home.

In lifetime mortgage schemes, the home is mortgaged and interest is built up on the loan amount. Lifetime mortgages include roll-up equity, drawdown lifetime mortgage schemes, interest-only, and enhanced equity release mortgage. Each of these schemes has a different advantage, which helps you determine which option is the best for you.

Roll-up Lifetime Mortgages
Roll-up equity releases are designed for the younger set because unlike all other equity release schemes this one can be used by a person 55 years or older, with certain lenders. The property holder is able to get the release without tax costs in the initial release of cash. All or a percentage of the home equity can be released in a mortgage. Typically the percentage of equity released is based on the age of the applicant. The younger an applicant the smaller the percentage will be due to life expectancy calculations. In this type of scheme the house is still under the property owner’s name; however, if the home is sold then the lender of the equity release is paid first and the rest of the balance is paid to the homeowner.

Drawdown Lifetime Mortgages
This type of equity release mortgage is a type of the basic equity plan with some key differences. A main difference is having a withdrawal option. Instead of taking a lump sum payment like the roll-up scheme offers, homeowners are able to withdraw the amount needed at the moment. This leaves equity in the account as a reserve that can be accessed only when needed. The initial drawdown carries the costs of setting up the scheme; all future withdrawals are fee free. One advantage of this scheme is that the interest accrued on the mortgage is only for the amount withdrawn.

Enhanced Equity Release
Enhanced Lifetime Mortgages are the latest equity release scheme in which the lump sum payment is based on health issues. If a property owner has a life expectancy that might be less than normal, there is a chance of gaining an additional lump sum amount to the normal percentage under the basic lifetime mortgage option. Due to ill health the money borrowed for the mortgage is most likely going to return quicker than someone with a longer or typical life expectancy; therefore, more can be released at once. The amount released is generally 5% more than the standard amount and this will make a big difference.

Interest-Only Equity Release
This option works best for someone who is in need of a lump sum payment, but has the funds to pay on the interest accrued. The amount borrowed is based on the type of mortgage selected and the evidence of disposable income that can pay the interest on the loan. Interest-only ensures that money is paid on the borrowed amount so that the cost does not increase over time. The principle is still there to be paid upon death or sale of the house; however, the interest is paid over time.

Home Reversion Plans
With home reversion equity release schemes, part of the property is sold in exchange for a lump sum. Depending on the situation 100% of the house can be sold and the homeowner has the right to remain in the house until their demise. If only a percentage of the home is sold then the remaining percentage of the house is sold to the equity provided upon death. In a sense, home reversion schemes tend to be better for those who wish to make sure that their inheritance is protected and something is left over for beneficiaries. Since there is no loan, there is no danger of repossession of the house. The amount of inheritance is based on the percentage of property still remaining, which can be better than the equity release mortgage that has to be paid off.