An equity release in principle is to release any equity that is tied up in your home. This equity is then given to the lender in return for money in the form of a large cash lump sum, monthly instalments or a combination of the two. It can come in many forms and there is a vast array of schemes that you can choose from.
Two Main Choices for Home Equity Plans
The main ones are the home reversion plans and the lifetime mortgages. The home reversion plan means that you will be selling part of your home or all of it in return for a larger lump sum of money than what you can receive from a lifetime mortgage. The home reversion provider recoups their money when the home is sold. A lifetime mortgage doesn’t mean you have to sell your home, instead you receive money in the form of a loan and the interest is charged on top of this. The loan and even the interest can be recouped on the sale of your home. Equity release allows you to live in your home until you die or have to move into long term care.
Benefits of Releasing Funds
Home equity plans are not for everyone; however there are a few notable benefits from this product. The first of these is that you receive a large sum of money or a regular income. This can be ideal for anyone retired so that they can carry on living to their standards in life.
There are also plans where you will not have to make any repayments until the home is sold. You will also never be forced out of your home and you are able to keep your home and the way you live in it. The money that you receive is tax free which is a huge benefit. If you choose not to take all your money at once then you can take a further release later if you have chosen a drawdown scheme. You are also able to protect any inheritance that you thought about leaving if you choose the right plan.
Types of Releases in Readable Format
• Home Reversion: you must be 65, sell part of your home, and gain a lifetime tenancy agreement.
• Lump Sum: take out a set amount of money, with fixed interest rate, no payments until death or move.
• Drawdown: a funded account with equity, where interest accrues only on the portion of cash actually used, not the entire funds available. Possible inheritance savings.
• Interest Only: a lifetime mortgage with lump sum, where you pay the interest each month rather than at the end keeping the principle balance the same.
• Enhanced: a lifetime mortgage for someone with an illness that needs a lump sum quickly and in larger sums than the lump sum can offer. Same interest and return payment as lump sum.
Disadvantages of Home Equity Schemes
While it is lovely to focus on just the helpful choices you have, the disadvantages cannot be ignored. Nothing is ever free and there are certainly payment options to consider with these home equity schemes. Interest is always going to add up when it is not being paid down. Unless you choose interest only lifetime mortgage or home reversion, you will owe more than the principle balance, which can put inheritance at risk.
One choice around this is called an inheritance clause in which you protect a portion of the home that cannot be taken by the bank as repayment towards the loan you have. It saves out value.
Another protection you can have in place is a no negative equity agreement in which the house is sold for full value, but the value is less than what you owe. It does not leave inheritance, but protects against more money being owed than the value of the home.
How to Spend the Money
So what can you do with the money that you released from your home equity plan? You can spend the money how you like. You can choose to repay your mortgage, make home improvements which will ultimately increase the value of your home, you can spend it on the day to day living expenses that you may have, and you can even spend it on various luxuries.
As it is your equity and your money it really is up to you how to spend the money that you are given from an equity release. It is also your choice to make regarding the product that is best for you. Now you have information with regards to what you might be able to do and the types of plans so you can obtain advice and get the product that makes the most sense.
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