An equity release is when a homeowner uses all or part of his house as a loan security. The owner is given money in return for a share in home ownership. The lender does not occupy the house. He only claims a monetary share of the house which he will reclaim when the house is sold. The house can only be sold when its owner dies or moves to a lifetime home care. Till then, the homeowner is the sole occupant of the house.
Not everyone can qualify for home release schemes. A homeowner must be over 55 years to be eligible for the scheme. He must have little or no mortgage on the property. The loan will be used to pay any balances on mortgages. This way, the lender will not have to pay off pre-existing mortgages upon the sale of the house. Loans given are usually at least £15000. Anything lower than that amount cannot be released. The value of the property also determines your eligibility for equity release loan. Only properties worth more than £75000 are admitted into the scheme.
Types of Equity release schemes
There are two main types of equity release schemes. These two are lifetime mortgage and home reversal mortgage.
Lifetime mortgage scheme
Lifetime mortgages allow you to retain total ownership of your home. You do not have to pay any rent. This is contrary to shared ownership or the home reversal type of equity release scheme. An applicant for a lifetime mortgage must be at least 55 years old. If he is living with a partner, the partner must also be 55 years old.
Different lenders have various ways of handling lifetime mortgages. A lender may allow you to enter into no negative equity guarantee plan. This program ensures you that the loan you take plus accumulated interest will not exceed the value of your property. The advantage is this scheme is that you will be able to pay the mortgage in full from the money made from the sale of the house. You will not be required to pay the balance of the loan from your own pocket. No negative equity prevents the horrors of endowment mortgages that many people in the UK are now putting up with.
Home reversal scheme
The other type of equity release scheme is the home reversal. An individual who enters into the home reversal plan immediately loses ownership of all or part of his house. This share of the house that the original owner loses goes to the lender. The original owner must, therefore, enter into a lease with the lender where he may live rent-free or pay or rent token to the lender if he has to live on the property. If he moves out or dies, the house is then sold and the money used to repay the loan. To qualify for the home reversal plan, you and your partner must be at least 65 years old. The loan issued is equal to or less than the current market value of your property.