The average life expectancy of people across the globe has increased over the last few decades thanks to modern medicine and nutrition. That means being old does not mean living on pills and resting the whole day. People are healthier, agile and active and post-retirement they look to accomplish things they could not during their working days. They are taking up new sports, going on international vacations and much more. But these involve considerable expense which their retirement savings may not be able to afford.
What is Equity Release?
Equity release schemes are products that help the homeowner over the age of 55 years to use the money (equity) tied up to their homes to come up with income for their needs without having to relocate. Many elderly homeowners are looking to release tax-free cash from their assets through equity release, and the money borrowed can be taken as a lump sum or in installments or a combination of both. There are mainly two types of equity release options:
- Lifetime mortgage
- Home reversion
In this type of scheme the loan is secured on your home provided you have the ownership and this amount need not be rapid till the end of the mortgage term or till the property is sold or the borrower dies or moves to a care home. This option is further categorized into:
- An interest roll-up mortgage: The interest gets added to the principal amount and the entire amount has to be paid at the end of the mortgage term or when the house is sold. The loan can be availed as a lump-sum or as a regular payment.
- Interest-paying mortgage: The interest does not roll-up on the money borrowed as the payments are made on a monthly or ad-hoc basis. The principal loan is recovered when the house is sold or the mortgage term ends. The loan can be taken as a lump sum, and some options allow you to pay off the capital too before the end of the term.
In this type of scheme, the complete or a part of the home is sold to a reversion company. That company will in return provide payment in lumpsum or in installments. A lease will be granted to the homeowners so that they can remain in the home for the rest of their lives, a more detailed synopsis can be seen here on how the scheme works. After the company sells the property post the death of the owner or when moved to permanent care, the reversion company gets the proceeds depending on the share of the property sold.
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Who can get an equity revision scheme?
There are a few conditions to be eligible for this scheme:
- For a lifetime mortgage, the borrower should be 55 years of age or more.
- For a home reversion plan, the borrower should be 65 years or older.
- The property you are using for equity revision should be your main residence and should be in good condition
- It is not suitable if you have dependants
- If there is an earlier loan on the property, the value of equity release will be based on the current market value of your home and the outstanding loan amount.
If you decide to go for an equity revision scheme consult a specialist to understand if it is right for you. Sometimes selling a business needs to be considered in succession planning and equity release.