How does equity release work?
There are two main types of scheme. These are called ‘lifetime mortgages’ and ‘home reversions’.
With a lifetime mortgage you take out a loan secured on your home. This mortgage may be:
- a home income plan;
- an interest-only mortgage;
- a roll-up mortgage (rolled up means interest is added to the loan, for example each year);
- a fixed repayment mortgage.
The mortgage is repaid from the proceeds of the sale of your home when you die, or if you move out of it (perhaps into a care home) when the scheme will usually end and your home will be sold.
With a home reversion plan you sell all or part of your home to a third party, normally a reversion company or an individual. In return you usually receive a cash lump sum and in some cases a regular income. You can usually continue to live in your home for as long as you wish.
Who would my home belong to?
If you take out a lifetime mortgage, you continue to own your home (but subject to a mortgage). If you choose a home reversion, all or part of your home belongs to somebody else. With some schemes, the new owner (or part-owner) is the reversion company itself. With others, it acts as a middleman and finds an investor, which could be a company or a private individual, to buy part or all of your home.
How do I get my money through an equity release scheme?
Equity release schemes can provide you with a cash lump sum or a regular income. Depending on the type of scheme you choose, you have a number of options.
- You could take the lump sum to use as you wish.
- The lump sum could be invested, either in an annuity or some other type of investment to generate a regular income.
An annuity is an investment that converts a lump sum into regular income for the rest of your life. Generally, the income you get will either remain the same or will rise annually by a set amount (eg by a fixed percentage, or in line with the Retail Price Index). The older you are when you take out an annuity, or the poorer your health, the higher the income you will get from it (because there are fewer years over which the income will need to be spread).
There are various other types of investment you could be offered. Make sure you find out whether the income is fixed or variable and remember the general rule that the value of investments can go down as well as up.
- You could get income, or simply money when you need it, on a drawdown basis. This is not linked to an investment.
Some schemes combine these features. For example, you could take a lump sum at the start, and then draw down income thereafter. If you choose income, make sure you understand how much you will get and when you will get it.
And remember, if you want to put some of the money in a deposit account, it will probably earn interest at a lower rate than the rate you’ll be charged on the money you release. In other words, you would be worse off overall.
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