Equity release explained Equity release schemes
If you're facing a pension shortfall, need to meet an unexpected expense or want to fund a retirement treat, equity release is undeniably attractive. It allows you to tap into the wealth you've accumulated in your property without the hassle of having to move.
Equity release doesn’t come cheap, however. A lifetime mortgage can cost almost four times what you borrow after 20 years, while some home reversion schemes demand more than 70% of your home’s value for just a 20% advance.
Although the Bank of England base rate is at an all-time low and normal mortgages rates have tumbled, rates for lifetime mortgages (the most common form of equity release) remain high. Average rates have fallen, from 7.23% in 2007 to 6.64% at the end of 2012, but equity release is still very expensive compared with a conventional mortgage.
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Equity release: types of scheme
There are two main types of equity release: lifetime mortgages, which allow you to borrow money against your house; and home reversion, whereby you sell a share in your house.
With a lifetime mortgage, you borrow a proportion of your home's value. Interest is charged on the amount but nothing usually has to be paid back until you die or sell your home. The interest is compounded or 'rolled up' over the period of the loan, which means your debt would almost double in 11 years at current rates.
Home reversion schemes
With a home reversion scheme, you usually sell a share of your property to the provider for less than the market value. You have the right to stay in your home for the rest of your life if you wish. When you die or move into long-term care and the property is sold, the provider gets the same share of whatever your home sells for as repayment. For example, if you sold 50% of your property to the provider, it would get 50% of the sale price.
You can take out some lifetime mortgages from the age of 55, but home reversions are available only to people aged 65 or older. Some enhanced products offer more favourable terms if you're a smoker or have health problems that could decrease your life expectancy.