An Explanation of the most common
To enable this quite wide product area to be explored in digestible pieces it is important to break out certain market segments. For the benefit of this discussion age will be used as the main divider in terms of which products are available to whom. Before we get to that stage we need to understand that equity release as an overall high level concept involves a homeowner or mortgage payer using some of the equity within their home or another dwelling they own to raise some money by releasing that equity to a lender or similar body in exchange for a sum of money. The equity in a property is the difference between any monies owed on the property to lenders such as banks, building societies etc. and the current realistic saleable value of the property.
The amount of the available equity you can release within a said property varies by:
-- The mechanics of equity release being used;
--The age, employment status and potentially the credit profile of the borrower;
--The value, location and condition of the property being used as security;
--Any other specific nuances of the particular lender product being considered.
As mentioned earlier the age of an individual dictates which ``mechanics`` or types of product are accessible to that person. The key age when it comes to releasing equity is 55 years old.
Essentially people aged from 21 to potentially 70 years old can look at releasing equity through a remortgage, a secured personal loan (which sits behind the existing mortgage as a second charge on the property), sale & rent back (this is quite rare and specialised) or a further advance from their current lender. All of these are pretty well know and common with the exception of sale and rent back which involves a company buying your property from you at a discounted price but allowing you to stay in it through a tenancy agreement as a tenant. As you can imagine this has wide ramifications and it is wise to seek independent advice before embarking on this route.
In addition to the routes above people of 55 years minimum can utilise a lifetime mortgage or home reversion scheme to raise funds. These products are specifically designed for the more mature consumers, who are potentially seeing income levels fall as they enter retirement but have chipped away at their mortgages so have more equity than many younger borrowers, or may in fact have no mortgage left at all. The basics of each product are as follows:
Lifetime Mortgages - These are taken out usually on a no monthly repayment or interest only repayment basis. The lender advances you an amount of money as a mortgage for you to spend pretty much as you wish except any existing mortgage will be cleared from the advance funds. Any interest that is not being paid off during the term is added to the initial balances and rolled up. Clearly as the mortgage term carries on the interest added to the mortgage balance will attract further interest on top of it. This type of mortgage continues until the borrowers either moves (if certain criteria are met), dies or goes into permanent care. At these points the house is usually sold to pay back the mortgage balance outstanding and any monies left over is paid to the client or their estate if deceased.
Home Reversion schemes - This works differently to mortgages as most people would normally perceive them. In this scenario a reversion scheme provider will buy a partial or full equity stake in your home for a sum of money which they pay to the property owner. If there is already a mortgage in place this sum will be used to pay of the current mortgage first. The money paid for the stake in the property will be below the actual pro-rata value of that stake, for illustration purposes only a lender may offer you 30% of the value of your home for a 50% share of the ownership. Products and schemes on the market vary over time and the cited figures are not an actual scheme, so you should seek advice when you are ready to look onto this type of scheme. This is because the lender will allow you to continue to live in the property through a lease agreement for their component and will not be able to recover their investment until a specific event such as you move house (subject to certain criteria), die or move into permanent residential care.
If you want to stay abreast of what's going on be sure to follow us on Twitter.
Subscribe to FREE Newsletter
Find out why?
JUST CLICK HERE