How Do Equity Release Schemes Work and What You Need To Know
How are you planning to finance your retirement? Will it be through your pension, your savings or are you thinking of funding your retirement through your home? More and more people are using equity release schemes to finance their retirement. Equity release products essentially allow you to extract the equity that is locked in your property to convert it into tax-free cash.
Many people living in the UK traditionally start off by buying a house with the use of a mortgage, and continue to pay off this mortgage through a large part of their lives to eventually become property rich. Many people however, don't have sufficient savings that can help them finance their retirement sufficiently. So in essence people end up with very expensive assets which would have appreciated in value significantly if they bought 20 years ago or so and ultimately their properties end up being worth hundreds of thousands of pounds but yet they find it difficult to finance their retirement because a lot of their money has been tied up in their property in the form of equity.
This is where equity release schemes come in. Equity release is a very useful tool for people to be able to extract the equity from their homes and spend the cash in whatever way they like. If you're looking to release equity from your property then it is really important to note that you need to get good professional advice to make sure that you select the right products to suit your personal needs. Making the wrong decision can have serious implications on your finances so getting good independent advice is imperative. So let's have a look at equity release schemes in more detail.
There are 2 main types of equity release schemes. One of the equity release schemes is called a life time mortgage and one is known as the other is called the home reversion plan. To qualify for either one of the equity release plans, you need to be aged 55 or over. From the consumer perspective, the older you are the better.
When you choose the right equity release scheme, you can either get a cash lump sum payout or you can opt for an income generating scheme, or even a combination of the two options. When you choose an equity release scheme, you can remain living in your property and will be responsible for the upkeep of the home. The two main types of extra release schemes are given below:
Home reversion Plan
The home reversion plan and lifetime mortgages both offer homeowners the chance to use equity release schemes to supplement their retirement incomes. Each of the equity release plan is specifically designed to address individual financial needs.
The lifetime mortgage is a loan that is secured on the property of the borrower and lasts throughout the individual or the couple's lifetime until either they die or they are taken into permanent care. With a lifetime mortgage compound interest is charged on the capital borrowed throughout the life of the loan. This loan is repaid by selling the property when the homeowner dies or when he or she is taken into full-time care. The property owner has a full write to remain in the property.
With the home reversion plan the homeowner effectively sells their property to a company in return for a lump sum cash payment or a regular income throughout their life. The homeowner could continue to live in the property until they die or until permanent care is needed.What do you need to know about equity release schemes?
One of the things about equity release schemes that you need to think about is that once you've release the money from your property and spent it, it is essentially gone. For many people who are taking out equity from their property the move can be considered by many a last resort to raise extra finance. So say for example a person is due to be taken into long-term care and one of the options they may have is to sell their property to fund the care. However, if they have taken out equity from their property then the asset is no longer there’s to sell. So basically you need to think about the provisions that you have in place for later life and ensure that an equity release scheme is a right product for you.
You also need to think about how your family may feel about you taking out all the equity from the family home and how this may impact any potential inheritance for your children. Many family members expect to inherit their parents’ home so you need to think about the expectations of the children to see how your plans fit in with expectations. If your children are happy with you using your equity in your own purposes then a plan would be worth considering.
You also need to carefully think about the different plans available and determine which plan is the right one for you. Picking the wrong plan can potentially prove very costly so you need to consider all the different plans very carefully.
One equity release plan will not necessarily suit everybody. So it is important to understand the key differences between the different types of equity release schemes to make sure you choose the right one.
If you would like to gain a better understanding of how much cash you could release from your house then contact us and we will be glad to work through an illustration of a customised equity release plan for your circumstances.