Types of Equity Release

There are two types of equity release; lifetime mortgages and home reversion plans. Both are regulated by the Financial Conduct Authority, requiring advice from a financial adviser with a special qualification in equity release.

Lifetime Mortgages

Lifetime mortgages are similar to standard mortgages i.e. a loan is taken out which is secured against your property's value. You are using the value of your home as security for borrowing money. The loan (and any interest charged) is repaid out of the future sale of the property, usually when you pass away or go into long-term care (or if you are a couple, until the survivor passes away or goes into long-term care). The main difference is that with a standard mortgage you make regular payments in order to repay the mortgage in full over a set period of time, whereas with a lifetime mortgage you can have a large sum of money and are not required to make any monthly payments out of your retirement income at all. Instead, the interest is added to the loan and is repaid at the end, which as the name suggests, is at the end of your lifetime.

Over time the loan will increase in value, however, this can generally be offset by future increases in your property’s value. In most cases, the value that you purchased your home for compared to the current value, means that your property has increased in value over time. Speaking to a specialist adviser that JNS Financial can introduce you to, will help you understand how your property has increased on a percentage basis each year, and what the effect of a lifetime mortgage would do to your equity in the property.

Lifetime Mortgages

 

Benefits:

  • You retain ownership of your property

  • You can use the cash raised as you wish

  • No monthly payments are required

  • You are guaranteed lifetime occupancy of your property

  • The equity that remains in your property after your loan is repaid, is available to you or your beneficiaries

  • Interest rates are usually fixed for life, which can give protection against economic fluctuations

  • You can benefit from future house price growth

Drawbacks:

  • The debt may roll up quickly and erode the equity in your property, which can affect the legacy left to beneficiaries

  • Increases in capital or income from a lifetime mortgage may affect your right to state benefits

  • Younger borrowers are likely to see a higher level of rolled-up interest over their lifetime

Home Reversions

 

Benefits:

  • You can use the cash raised as you wish

  • No monthly payments are required

  • You are guaranteed lifetime occupancy of your property

  • You can elect to sell part of your property thereby retaining some equity which is available to you or your beneficiaries

  • There is no rolled-up interest

Drawbacks:

  • You lose all ownership of the property

  • You lose the right to any future growth in the property

  • The cash or income raised will not represent the true value of the property sold

  • If you pass away soon after the arrangement, the deal will have been very expensive

  • Moving home may prove difficult in the future

  • Increases in capital or income from a lifetime mortgage may affect you right to state benefits

Home Reversions

Providers of home reversion plans will purchase all (or a share) of your property in return for a cash lump sum. They will own the property but in return, you are granted a lifetime lease which gives you the security to live in your home rent free until you pass away or move into long-term care (or if you are a couple, until the survivor passes away or goes into long-term care).

The amount that you will receive for the share you sell, is based on your age. The younger you are, the longer you are expected to live, therefore the lower the amount you will be provided with. The amount is also provided at a premium, therefore if your house is worth £200,000, you may only receive £100,000 depending on your age. Whereas with a lifetime mortgage, interest is charged on the loan, with a home reversion plan, no interest is charged therefore interest cannot roll up and erode further equity in your property. Although lifetime mortgages can offer an inheritance protection guarantee, if you are intent on leaving an inheritance to your beneficiaries, a part-home reversion plan may be a good option for you.

Comparison

Both types of equity release can provide you with tax free cash that can be used for anything you wish. For example:

  • Those holidays of a lifetime you deserve or to replace your car to last through retirement

  • Help your children by gifting them money for weddings, getting on the property ladder, or university fees

  • A conservatory to while away those retirement years in comfort

  • Home improvements or repairs which will add value to your property

  • Repay your existing mortgage to free up more surplus retirement income

  • Pay off loans and credit cards to allow more financial freedom

  • To pay Private medical bills that can pile up, or to provide care in the future

The above list is not exhaustive, and remember, the money that is tied up in your property is yours to do with as you wish.

The market for both equity release products is now regulated under the Financial Conduct Authority. The previous regulations unit was the Safe Home Income Plans (SHIP), however in 2012 they re-branded as the Equity Release Council who now ensure that all lenders, advisers and solicitors who are members of the council, comply with strict principles and standards.

As most people do not wish to give up ownership of the house that they have worked so hard to own, many people discount home reversion plans as an option. However, if you think a home reversion plan may be suitable for you, please contact us now  so that we can introduce you to a fully qualified adviser in your area. For more information about Lifetime Mortgages, please click the button below.

JNS Financial Ltd is a limited company registered in Wales at 16 Station Road, Llanrwst, Conwy, LL26 0EP, under company number 11931412. JNS Financial Ltd provides access to a range of retirement services from specialist providers including The Right Equity Release, The Right Will and Safe Hands Funeral Plans. JNS Financial Ltd is not regulated by the Financial Conduct Authority (FCA) and is not authorised to give financial advice. However, we are proud to introduce you to The Right Equity Release Ltd who are regulated by the Financial Conduct Authority, for all of your Equity Release, Mortgage and Protection requirements. The Right Equity Release does not charge any up front fees and a fixed fee is only charged on completion of an Equity Release Plan. Typically, this is 1.5% of the total facility or £1,295 whichever is the greater. All information published on www.jnsfinancial.co.uk is intended for consumers based in the UK as general information only, and does not constitute financial advice. Please contact JNS Financial on 01492 818589 for further information.

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