The equity release marketplace has developed since the 1960′s when the first equity release schemes were introduced by Hodge Lifetime. Since that date, many schemes have come and gone to leave us with the most popular era for equity release schemes in its history.
Bringing all the schemes to the fore include two main equity release scheme formats which are the lifetime mortgage and the home reversion plan. Of these, the lifetime mortgage has evolved into the leading format for equity release schemes today. With over 98% of all plans being written on a lifetime mortgage basis, here we seek to answer questions such as how does equity release work, which are the best equity release schemes and why.
To understand the basic concept of the lifetime mortgage is to consider your standard residential mortgage, but without any monthly payments, nor a fixed term for the loan. Therefore, a lifetime mortgage works simply by taking a cash lump sum to spend on whatever you wish. The lender places a 1st legal charge on the property, which is then registered at the land registry.
As soon as the release of equity is made the provider then starts charging interest either on a monthly or annual basis. This interest then compounds and is added to the balance and grows over time. The term of the lifetime mortgage is indefinite, as the loan will just run for the rest of the mortgagors life. At this point, whether its death of the last survivor or them having to enter long-term residential care, the property will then be sold. At this point, and once upon receipt of the sale proceeds, some or all of the proceeds will pay off the mortgage and any remaining balance passes to the nominate beneficiaries.
A major benefit of lifetime mortgages is that the equity release interest rate is fixed for life, thus providing the mortgagor with the safe knowledge of knowing what the future balances will be year-on-year. The only unknown is what the final balance will be as this will depend on how long the lifetime mortgage runs for…in other words ‘life expectancy’ which is an unknown!
Within the domain of lifetime mortgages are further sub categories of these lifetime loans underlining the flexibility of these plans. EquityReleaseCalculator.net has identified the following three forms of lifetime mortgages which provide a greater flexibility & personalisation for retirees wanting a tailor-made equity release plan.
1. The Drawdown Lifetime Mortgage Scheme
The most popular form of equity release scheme on the market today. Again using the principle of taking an initial lump sum, the difference between the drawdown & the standard lifetime plan is that with drawdown you don’t take all the funds upfront. The concept of drawdown lifetime mortgages is to create flexibility and to save on interest costs over the longer term. These savings come in the form of a cash reserve facility which is created from inception of the… Read more about drawdown lifetime mortgages
2. The Interest Only Lifetime Mortgage Scheme
‘Interest only’ is a popular and much debated term in the news today for many people either reaching retirement, or in retirement. For many babyboomers, the interest only lifetime mortgage provides a practical solution to those possessing interest only mortgages with lenders demanding immediate repayment. Many of this age group have experience of managing debt through their lives & feel quite capable of continuing to do so into retirement. The problem has been that… Read more about interest only lifetime mortgages
3. The Enhanced Lifetime Mortgage Scheme
The latest innovation in the equity release industry and uses similar underwriting criteria that is applicable to enhanced annuity plans. The concept of impairment is not new to the equity release industry, but it has been many years now since an equity release plan has taken health into account. Considering life expectancy, the lenders underwriters will assess the applicants health record and based upon the replies to a lifestyle & health questionnaire will determine how much the lender is prepared to offer… Read more about enhanced lifetime mortgages
Home reversion plans were the original format for equity release schemes which started in the 1960’s with Hodge. The home reversion concept has changed little since, with some minor variations on a theme from the few remaining home reversion specialists.
In principle, a home reversion scheme offers security of knowing exactly where you stand, once the release of equity has been completed, in so much that you will have sold a percentage of your property to the home reversion company in exchange for a tax-free lump sum or a regular income. The amount of property sold will be determined by the size of the lump sum required.
You are able to sell all or part of the value of your property in exchange for a cash lump sum and retaining the right to remain living in your property for the rest of your life. At the point whereby the last person has died or moved into long-term care, the property will then be sold. Depending on the proportion of the property sold, will determine what percentage will be taken by the reversion company & how much will pass into the estate.
For further information on home reversion plans, the lenders & home reversion pros and cons, please click here. Alternatively, use our free Home Reversion calculator below to understand your maximum cash release.
Contact us now for your free equity release advice. Further information on the different types of equity release schemes can be found here: –
These are lifetime mortgage and home reversion plans. To understand the risks & features always request a personalised Key Facts Illustration.