Equity release schemes come in a variety of types. Determining which is the best equity release scheme for you is important not only to ensure you can live with your decision, but also to make certain you have the right plan for your needs. Industry providers have devised several products to fit a variety of consumer needs. Providers try to create products that can help just about any retiree looking for financial assistance through equity release. There are specific categories that each equity release fits into. These categories are named in such a way as to point out the main benefit or difference that exists between the options. After reading over a little about each of the schemes you should have a grasp on which one may be better suited to your financial situation.
This is a main category option in loan form that can help homeowners. A lifetime mortgage has a principle sum with compounding interest. Often the standard lifetime mortgage is called a lump sum or roll-up mortgage because homeowners receive a one-time lump sum payment that rolls up the interest onto the back of the loan. The main feature of a lifetime mortgage is to hold repayment of the entire capital sum and any compounding interest until the homeowner dies or needs to move into a care facility.
Typically the home is sold to repay the loan plus interest. If the current value is more than the amount owed on the loan and interest, the difference is provided to the beneficiary of the estate. Lifetime mortgages can be taken out as early as age 55, where the youngest homeowner named on the title is 55. Housing values also apply as criteria to take out a lifetime mortgage. Most companies require a housing value of at least £70,000; however, each provider needs to be assessed for any qualification differences.
Drawdown Lifetime Mortgage
Drawdown lifetime mortgage is one option with a slightly different benefit than standard lifetime mortgage products. A drawdown mortgage is set up for a smaller lump sum with a cash reserve facility. Homeowners can make further withdrawals from the cash facility as they need more funds. This works best for someone who does not need a huge lump sum all at once, but would like access to more funds should they need it later. Interest will only accrue on used portions of equity and not what is unused in the reserve facility.
Enhanced Lifetime Mortgage
Enhanced, impaired, or ill-health lifetime mortgages are the same product just with different keywords based on how the provider wishes to name them. This type of lifetime mortgage is a lump sum option; however, with an enhanced lump sum. The loan to value percentage on an enhanced lifetime mortgage is higher than the standard lump sum. It has a third qualification criterion which is a health and lifestyle questionnaire to determine if any ill health warrants a higher maximum loan to value. It benefits individuals who need more funds, who also have a health condition that could jeopardize their longevity.
Interest Only Lifetime Mortgage
This is the only lifetime mortgage that has a required monthly payment. For individuals who do not want their lump sum capital to be gaining interest, there is an option of using their pension or other income to repay interest each month. As long as a homeowner has supporting income and can maintain payments, the principle balance remains the same as the day the loan was initially taken out.
Voluntary Repayment Plans
Voluntary repayment plans are the newest option for equity release schemes. They are all lifetime mortgages and may fit any of the above named categories in terms of main benefit. The difference with a voluntary repayment plan is that a homeowner can voluntarily make repayments throughout the life of the loan without early repayment penalties. Interest only payments or capital and interest payments can be made, where the homeowner can pay up to 10% per annum of the capital without penalty. It is a flexible payment plan.
Home Reversion Plans
Home reversion is not a loan. Homeowners will sell a portion or the entire home to a home reversion provider. In return the homeowner lives in the house under a lifetime tenancy agreement – rent free. The funds are tax free just like lifetime mortgages. The difference is no repayment is required. At the end of life or move to long term care, the home is sold at full market value. The portion unsold during the life of the homeowner is given to the beneficiaries and the provider makes their return on investment.
Retirement mortgages are not a part of the Safe Home Income Plan (SHIP) created by the Equity Release Council Code of Conduct and Financial Conduct Authority. They are mortgages with repayments, but available for individuals in retirement who have enough pension or other income to support a mortgage in retirement.