An equity release is one way for people aged 55 and over to use the equity they have accrued in their home. They are able to continue living in their homes but can use the money to fund their retirement. These loans come with advantages and disadvantages.
An equity release mortgage will pay you the cash value of your home in either payments or a lump sum. You continue to live in the home until you pass on or move to a long-term care facility. The two general equity release mortgage types are the home reversion plan and the lifetime mortgage.
With a lifetime mortgage, interest will be charged and added to the amount of the principal. It will not be paid off on a monthly basis. Because of this, the amount that has to be repaid in the end will continue to increase. At the time the home is sold, upon moving or death, the loan and interest will be repaid.
Since the time that this will happen is unknown, you cannot predict the amount that will need to be repaid. Because the interest is compounded, the repayment amount can potentially grow until there is only a little, if any, money for your heirs. There is, however, usually a clause that states the repayment amount cannot be more than the amount for which the home is sold.
In the case of what is known as home reversion scheme, you sell your property, either partially or in full, while you are still alive. However, you are permitted to continue living there until you die or move to a facility. You are not assessed any interest. At the time of your death, the reversion company will sell the home and keep whatever profit is generated. Again, because there is not telling when you will die, you will not receive the full current price for your property.
Anyone 55 or over can qualify for a lifetime mortgage. Home reversion schemes generally require you to be 65 years of age or older. You must have either no mortgage or only a small one. You must be looking for a large sum of money so that it is considered to be profitable to the lenders.
Equity release schemes are regulated by the Financial Services Authority (FSA). In order to advise you on them, the advisers have to pass specialist exams. These laws are for the protection of the consumer.
If you think you could benefit from an equity release mortgage, do not rush into it. Research all the options you have and make sure you understand how it can affect you and your heirs. Then find a lender with a good reputation who can refer you to satisfied clients for their feedback.