Equity release is a scheme in which people over the age of 55 can place their homes on security to effectively take out a loan. The equity release scheme is helpful for individuals who want a lump sum or a regular income for their retirement, but do not have enough in their savings. The scheme safely uses your home as a security to extract cash out of your property while you still own it. The payment for the loan is made after the sale of the property is complete or when the individual dies. The equity release market has been surging in the United Kingdom in recent year.
Equity release market growth
As the policymakers’ outlook of equity release improves and with a good relationship with the government and Financial Conduct Authority (FCA) the equity release market is expected to garner more interest from the public. The “no negative equity” also guarantees that the money you need to pay back is fixed no matter how the property value changes in the future. According to the Equity Release Market Report of Spring 2017 from Equity Release Council:
- 2016 was the record breaking year for equity release growth.
- The first half of 2016 saw 37% growth, and the second half was up by 38% compared to the same period in 2015.
- 65% of customers opted for drawdown option, 35% chose lump sum option and a small number took out home reversion plans.
- This growth accumulated a huge total of 1.24bn of financial transactions.
Home reversion scheme
There are two types of equity release scheme popular in the United Kingdom, home reversion scheme and lifetime mortgage. An individual has to be over 65 to be accepted in the Home reversion scheme. In home reversion scheme, the equity release only buys a share of your home (say 20%). The amount you get is, however, lower than the current market value. You do not have to move your assets or let anyone move in. The equity release company does not get any money until the property is sold. Once the individual dies or moves to a different long-term settlement, the property put on sale, and the company gets a percentage of the share it bought.
Lifetime mortgage scheme
Lifetime mortgages are the more popular of the two scheme. Here an individual borrows an amount equal to a relative value of their home. An individual over 55 can start with the home reversion plan. The person needs to pay interest on the loan. They do not typically need to pay any amount until they die or the property is sold. The interest is then compounded which could mean with the current rates, the debt could double in 11 years. Equity Release Council reported a growth of 22% in customers with lifetime mortgage scheme in 2016. The trend of increase have been growing since 2013 and equity release market is one the fastest growing mortgage market in this period.
Costs of Equity release scheme
The cost of equity release is quite expensive compared to regular mortgages. The lifetime mortgage scheme can in estimate cost three times more in 20 years, and with home inversion plan you may only get 20% advance with a 70% of your property in used in the scheme. It should be considered if you are facing a difficult financial situation without the fear of losing your home. Although FCA handles the marketing of equity release, you may want to consult with a financial advisor registered with the FCA.
For ageing people, this scheme provides a comfort without dependence on family or relatives. Still owning an accommodation without fear of losing it makes it an interesting scheme. The growth also reflects that many individuals are interested in this financial assistance. However having a clear picture of the scheme will make help you the right decision.