Equity release: How to unlock the wealth tied up in your property
Equity release can be termed as scheme which people over fifty five can choose to exercise if they do not have much savings for their retirement. To start with the basics, Equity Release is a type of mortgage wherein if you take a loan, you do not have to necessarily make a fixed monthly payment but can pay off the loan together in the end.
The loan is offered to you on the basis of the value of a property you own, which could be your house or anything which has a capital value. The loan amount is compounded with interest every year until you have die or sell your property. It is an effective scheme where you could use your property and also get an income out of it.
Relevance of equity release
Equity release is mostly accepted by the older couples who do not have heir to pass on their properties. They make the most of their retirement life by making an handsome money of their property till they die and do not have to worry about the fate of their property after their death. If they take loan based upon the value of their house, the mortgage is dissolved only when they die or decide to permanently move into a care or other permanent residence. Equity release can be of two types — Lifetime Mortgage or Home Reversion Scheme. Let’s further go into the details of these two schemes.
Lifetime Mortgage
Lifetime Mortgage is a very popular scheme. In this scheme you are provided a life long loan whose amount is decided by the capital value of your property. Once you have taken the lifetime mortgage scheme, unlike the usual mortgages you do not have to trouble yourself for making the regular monthly payments. You can repay the debt all at the end when your property is sold.
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The interest is charged on the amount which is granted as a loan and a compound interest is added up or to give a context, the amount us ‘rolled up ‘over the years which has to be repaid by selling the property.
Disadvantages of lifetime mortgage
Lifetime Mortgage maybe a perfect scheme for people in their retirement who do not have much savings and hence resort to taking a loan. However, once you take the loan, to clear the debt, you almost lose out on the entire amount for which your property is sold. When interests are applied, assuming the current interest rates, your debt almost doubles in only a period of ten years. You can hardly pass on anything to the next generation.
The loan amount you receive, when compared to the net worth of your property is hugely disproportionate. Once you have taken a lifetime mortgage, there is hardly any way out of it. You can no longer reverse your decision because you might be charged a hefty fine for it. You need to make sure that you are completely ready for this scheme, so sort out help from experts and make sure you have a clear concept of the amount you will receive as a loan and the amount you have to repay as a debt.
Home Reversion Scheme
Home Reversion Scheme is a lesser known scheme. Here, unlike lifetime mortgage, only a part of your property is entitled for the scheme and not the whole of it. In this scheme you are allowed to use your property, but a equity release company hold rights on a part of it. However they can not do much with their share until the whole of the property is sold. When their share is sold you get a much lesser value of it. This results in losing out a lot on your entire worth of your property.
Disadvantages of Home Reversion Scheme
Home Reversion Scheme is offered to people who are above sixty five. The scheme is not a recommendable scheme and can be a profitable one only under few circumstances. You should not opt for this scheme if you are not confident about it as it mostly drains your assets without a proper return.
Conclusion
Equity release has its own advantages and disadvantages. It is advisable you make a wise decision on the loan you take or the share of your property you sell. Although, it fetches quick money, you should be aware of the consequences you might face while repaying the debt.
