As people live for longer, planning carefully for retirement becomes more and more important. Living costs are on the rise, and there are a growing number of people who own valuable property but are strapped for cash during old age. This is why equity release schemes have become a popular concept. Because it allows people to free up the equity tied up in their homes, without the need to sell the property or move.
Equity release schemes have come a long way since they were first introduced to the market. Rising demand for equity release solutions resulted in increased competition among providers, and today, the equity release market is much more favourable for customers. Equity release plans available today are much more flexible, and interest rates are also generally lower than a few years back.
The two main types of equity release are lifetime mortgage deals and home reversion schemes. Both types of equity release allow customers to free up some of the equity built up in their home and use it as cash. The amount can be taken as a lump sum or in the form of monthly installments. Most equity release schemes need to be repaid only when the owner has died or moved into care, which is when the property can be sold.
A lifetime mortgage is a loan that is taken out on the property. In this case, the applicant retains full ownership of the house. The loan along with the accumulated interest is repaid once the property is sold. Interest that is incurred on the amount is added to the principle amount, so that effectively, interest is charged on the previous interest. This is known as compound interest. One of the most common concerns with compound interest is that the debt can quickly grow very large.
There are some new lifetime mortgages known as interest only mortgages, which do not incur any compound interest. Instead, interest is paid monthly, and in the end the amount to be repaid remains exactly the same as the original amount that was borrowed. Interest only lifetime mortgages may have higher interest rates in order to be financially viable for the lender.
Home reversion plans involve selling a certain portion of the property to the lender. The ownership is transferred into the lender’s name, and the customer retains some portion of the ownership. When the house is sold, the lender retains the same proportion of the sale value. Both home reversion and lifetime mortgage equity release schemes have their own pros and cons. If you’re considering equity release as an option, consult a financial advisor for objective and professional guidance.