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Equity release explained Equity release schemes

Senior couple

Equity release could increase your retirement income but explore alternatives first

If you are in, or approaching, retirement and can identify with the phrase ‘property rich, cash poor’, you may be considering some kind of equity release scheme to access your wealth. But an equity release scheme may not be the best or only solution for you. It should be considered only once you’ve explored all other options.

The market has also shrunk considerably since the financial crisis, leaving you with fewer products to choose from. When we looked at the market in July 2007, there were 23 providers offering equity release products – in early 2010 there were fewer than half this number. 

And the interest rates of fixed-rate lifetime mortgages (one type of scheme) were still between 6.54% and 7.38% – similar to 2007 – despite the Bank of England base rate falling from 5.75% to an all-time low of 0.5% over the same period, which has led to lower savings rates.

Types of equity release scheme

There are two main types of equity release scheme – lifetime mortgages and home reversion schemes. 

Lifetime mortgages

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 25% of your property to the provider, it would get 25% 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 products offer more favourable terms if you’re a smoker or have health problems that could decrease your life expectancy.

See Equity release schemes compared for a comparison of the lifetime mortgages and home reversion schemes on the market in March 2010 from the 11 providers that offer equity release schemes. 

 

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