Equity Release Scheme

Equity Release Scheme

Equity release schemes enable individuals over 55 to retain their house, whilst at the same time generating a cash sum using the property’s value. However, the provider of the equity release scheme is either paid the mortgage in full, or they are entitled to shares in the property by time the contract has been terminated. If the provider has shares in the property, the property is usually sold on the market at the time the contract expires. The contract will expire in the event of the borrower’s death, or the borrower indefinitely taking residence into a care institution. Our aim is to formulate an equity release scheme, which is suited to the needs and desires of the client.

Equity release schemes comprise of two different arrangements, lifetime mortgage equity release schemes and home reversion equity release schemes.

Lifetime mortgage equity release schemes work on the basis that a loan is secured on the borrower’s home. Interest is compounded during the term of the mortgage, which is either variable and paid back through monthly instalments (interest only lifetime mortgage), calculated on a monthly basis and paid along with the sum of the debt at death (rollover interest lifetime mortgage), or the income generated from the loan is used to by an annuity to pay monthly instalments of the loan and interest (home income plan).

Lifetime mortgage equity releases may be convenient as the borrower maintains ownership of the property, allowing some equity to be left in the estate of the borrower, which the inheritors are able to reap from. Also, no monthly payments are required so the borrower can use the money to their own desire.

However, money raised from the lifetime mortgage equity release scheme will be a relatively minute proportion compared to the value of the property. Furthermore, high interest rates would encourage an increased build of debts, deteriorating equity within the estate. This will affect the eventual legacy of the borrower, such as their children. Younger borrowers will be even more affected. Due to the fact they will have high life expectancy, they are likely to see a high level of rolled up interest. Our expert advisers are focused in understanding and offering the most sensible equity release scheme option for the individual.

The alternative arrangement from a lifetime mortgage equity release schemes are home reversion equity release scheme. When applying for this form of arrangement, the borrower must be aware that the provider is entitled to obtain full ownership of the house, or have shares within the borrower’s property. In exchange for this, the borrower receives a lump sum of money and is guaranteed residence in the property for the rest of their lives. At the event of the borrower’s death, the provider is authorised to sell the property, receiving all the profits from the sale if the arrangement is a full home reversion scheme or partial profit from the sale if a part reversion scheme was agreed.

A positive aspect of choosing to set up a home reversion equity release scheme is that higher amounts of money are offered to the borrower, compared to the amount generated with a lifetime mortgage equity release. The borrower is certain of the future of the property and knows they are guaranteed a home until they die. Due to the fact that the provider has a share in the house, no monthly instalments of interest have to be paid and the cash can be used as the borrower wishes.

In contrast, home reversion equity release plans result in loss of ownership of the property on the borrower’s behalf; this could be a psychological blow as they may find it difficult to adjust to the reality that they will not be able to invest into the future of the home. In addition to this, the maximum income received by the borrower could be limited if the arrangement permits annuities.

Borrowers must contribute deep thought into the alternative options they have before enquiring for an equity release scheme. Taking out the wrong scheme can affect future plans, and may also leave the individual in substantial, unwanted debt. Our goal is to devise and suggest the most convenient equity release scheme for our clients, based on the client’s needs and requirements.

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This is a lifetime mortgage. To understand the features and risks, ask for a personalised illustration.