The principle of equity release is fairly straightforward in that it is a loan or second mortgage using the collateral provided by the increase in value of your home compared with the price you paid for it some years previously. This pre-supposes of course that you have had your house for some time and should have paid off the original mortgage or be close to doing so. For most people this means they need to be over 55 years old to qualify.
The lender for an equity release loan will want to take a charge over your home so that you cannot sell it without settling up first with the lender, and there may be penalties for early repayment. For many people though, this does not matter since they do not intend to settle the loan during their lifetime. They have the use of money now and the debt is discharged after their death by the sale of the house. If you are not too concerned about leaving an inheritance for family or friends then equity release can be an easy way to raise cash for whatever purpose you wish, although the prudent person may wish to invest in an annuity which then guarantees an income for life.
The situation is complicated by variations on the lending scheme and varying terminology used for home equity loans which can be rather confusing.
The scenario just described is often termed a lifetime mortgage where, either you pay monthly interest on the loan so that the total amount owing stays the same, or can be of the roll-up type whether interest is rolled up or added to the loan amount to be finally paid off by your executors or family when the house is eventually sold. A variation of the lifetime roll-up mortgage allows you to agree a maximum loan amount and draw from it as and when required. This means that interest is only then charged on the amount actually outstanding and not on the whole amount for the whole period.
Lifetime roll up mortgages involve borrowing against your home and may have consequences in terms of reduced state benefits. Committing to one at a relatively early age may mean not being able to borrow more in the future as the debt increases, and you end up spending all the money released.
With a home income plan you take out a lifetime mortgage with a lender who gives you an annuity in return, so that you have a regular (fairly fixed) income for life, and the interest payments on the loan are automatically deducted each month. This gives a degree of security but annuity rates may be low and you don’t necessarily receive the best deal this way.
With a home reversion plan you sell a percentage of the ownership of your house for an amount that represents less than the actual market value, but receive either a lump sum or income, and of course the right to remain living in your home as with the other schemes. The advantage for the lender is that when the property is eventually sold to repay the debt, the value may be considerably more and therefore the percentage return for the lender represents a much higher return on the loan.
With a home reversion loan the advantage to you is that you retain ownership of a portion of your home so your estate will have the benefit of that and any increase in value. Another advantage is that larger sums of money can be released than with a lifetime roll up type of mortgage.
As with many things in life there are different ways to achieve a goal, and your personal circumstances may play a large part in deciding whether an equity release loan is right for you, and if so, what type to choose. A truly independent financial advisor should be able to help.