How do you release the money tied up in your home?
You can release the money that is tied up in your home either with a lifetime mortgage or a home reversion scheme. There are a number of different types of equity release scheme but basically they fall into one of these two categories.
With a lifetime mortgage you secure a loan against your property that gives you a tax free sum of money. The interest on the loan adds up but is only paid off once you have died or moved into permanent care and your property is sold.
Points to be aware of:
- You still own your property and don’t need to make any repayments until it is sold.
- The interest builds up quickly as the interest you pay on a lifetime mortgage is calculated on the original loan plus the interest already added
- Equity release will affect any inheritance you plan to leave for family
- If you choose to pay the loan off early you may incur early repayment charges
There are however a number of different types of lifetime mortgage that address some of these points such as a:
Drawdown plans that let you release the money in stages so you only accrue interest on the money you have actually borrowed
Protected plans that let you protect a percentage of the property value so you can guarantee an inheritance
Repayment plans that let you pay off some of the interest so you will not owe as much in the long run
This is in addition to:
Lump sum lifetime mortgage plans that pay out a single tax free amount
Enhanced plans that are designed for people with specific illnesses and include greater loan values with better rates
Home Reversion Scheme
With a home reversion scheme you agree to sell a proportion or all of your property in return for a tax free cash sum. There are no repayments and no interest. Instead once you have died or moved into care and the property is sold, the equity release provider will receive their proceeds from the sale, based on the proportion of property they own.
Points to be aware of:
- Although you no longer own part or all of your home, you get to live there rent free
- You will still be responsible for maintenance on the whole property
- The price paid by the scheme provider will be lower than the market value
- If you wish to buy a percentage of the property back, you will need to pay market value
- You will not benefit from an increase in house prices on the percentage of the property you have sold