Many people spend their entire life working so that they can have a stable retirement. The goal of most people is to have security in their retirement period so they spend their entire life working to make sure that they own a home in which they can safely and securely spend their retirement. They ignore the dream car that they have always wanted or the dream vacation that they have always wanted to go on. If you are one of these people, there is good news for you. It is now possible for you to release some of the money you invested in your home. This is known as equity release. So what is equity release?
What is equity release?
Equity release is available to people who are 55 years and older. There are two main types of equity release schemes: lifetime mortgage and home reversion.
A lifetime mortgage makes it possible for you to obtain a loan secured against your property from an equity release provider such as Aviva, LV= or Just Retirement. A lifetime mortgage does not have a fixed duration nor are there any monthly repayments, however either monthly or voluntary repayments can now be selected.
To understand whether you qualify for equity release, use our free smartER research tool.
The four most common lifetime mortgages are:
• Roll-up lifetime mortgage
• Drawdown lifetime mortgage
• Interest only lifetime mortgage
• Enhanced lifetime mortgage
With the roll-up lifetime mortgage, you can obtain a loan with a fixed interest rate for the rest of your life. Thus you will be safe in the knowledge of knowing exactly what the balance will be in the future. Interest is added to the loan each year and compounds until the loan needs to be repaid.
The drawdown lifetime mortgage is similar to the roll-up lifetime mortgage with one exception. The money that you obtain from the equity release provider is held in a reserve account, thus giving you the opportunity to use it as and when you need it.
The difference between the interest only mortgage and the other types of lifetime mortgages is that the interest only lifetime mortgage requires you to repay the interest on a monthly basis. This has the advantage of the balance remaining static whilst the monthly payments are made.
While there are three common lifetime mortgages as you ask what is equity release, you should also be aware there is a forth option. It is called the enhanced lifetime mortgage. It is less common and more specific than any of the other equity release products on the market. You see for the enhanced mortgage you have to have an impairment to your life. Diabetes, cancer, or another illness that could leave your life shorter than the average person can net you a greater lump sum to use now while you are still living. It might sound cold, but at least if you need more funds now your health can be a factor towards getting it.
To understand how much you can release with an equity release mortgage, use our free lifetime mortgage calculator.
Home Reversion is Much Different
A home reversion plan is completely different from a lifetime mortgage in that instead of obtaining a loan that you will eventually need to repay, you can sell a portion or your entire property for a large sum of amount or for a monthly income.
Comparing Equity Release Products
Both the lifetime mortgage and the home reversion plan allow you to remain in your home until you die or until you move into long term care. You also have tax free cash in both situations. Since you gain funds that you can use as you wish, it is a matter of what you are comfortable with.
If you do not want to sell part of your home because you like the control of owning the home in full until you are ready to sell, then home reversion is not for you. If you do not want to have a mortgage hanging over your head even if it means repayment at the end, home reversion works better.
It is also a matter of comparing these equity release choices for possible inheritance. With two lifetime mortgages and home reversion there is definitely the possibility of leaving behind an inheritance. With all other equity releases it is based on the situation you set up and whether the market fluctuates enough that your home loses value. Lost value means lost inheritance. Find out what protections you can use to guarantee your family’s inheritance remains intact.
Equity release is a serious business, and you should always obtain a second opinion from a qualified financial adviser. If you need to find a regulated independent equity release adviser then call 0800 028 2366 who can advise you accordingly on what is equity release.