Equity release schemes

Rules

What should I bear in mind before considering equity release?

• You must insure your home, noting the mortgage lender's or home reversion company’s interest in the policy. (See section on ‘Home reversion schemes’ below)
• You are obliged to keep your home in a good state of repair
• If you fail to maintain your home, you may be forced to sell it. The mortgage lender/reversion company may carry out the repairs instead and add these costs to the amount you owe (with interest)
• If you move out of your home permanently (in some cases for more than a specified number of months) you can be forced to sell your home
• Some schemes forbid you from making certain renovations, such as putting up a safety ramp or railing, as it may reduce the market value of your home
• You may have to pay valuation fees, fees for independent legal advice and fees for financial advice you obtain.

It is important to bear the above items in mind when considering equity release, particularly if you are at risk of moving from home to long-term care as you get older.

What type of equity release schemes exist?

There are two:

• Lifetime Mortgages
• Home Reversion Schemes

Lifetime mortgages

Lifetime mortgages allow you to borrow money without having to make any repayments and you may continue to live in your own home. The amount of money you may borrow will depend on your age and the value of your home. You can borrow the money in a lump sum, by instalments, or both.

With a lifetime mortgage, the lender doesn’t own your home. The lifetime mortgage must be paid off when you sell the property, you move out of your home permanently, or you die.

Under the lifetime mortgage scheme, you are charged interest on any money you borrow. The longer your lifetime mortgage lasts, the more you will have to pay back. There are two types of lifetime mortgages and it is important to be aware of the difference between them:

• Fixed-rate lifetime mortgages: interest is fixed at a set-rate for a number of years or the lifetime of the mortgage.
• Variable-rate lifetime mortgages: the rate of interest will fluctuate with interest rates generally.

Always ensure your lifetime mortgage gives you a ‘no negative equity guarantee’. This means you will never have to repay more than the proceeds of your home if your home is sold for less than the amount you owe.

Home reversion scheme

A home reversion scheme means you are selling part (or a percentage) of your home. You should bear in mind you will get much less than the market value for the percentage you sell, but you can continue to live in your home for the rest of your life. When you die and your home is sold, the reversion company will get their percentage from the proceeds of the sale.

For example, if a home reversion company bought a 20% share in your home, they would get 20% of the proceeds from selling your home, either when you move out of your home or after your death. The other 80% would go to you (or your estate after your death).

The percentage of your home the reversion company will buy depends on your age and the value of your home. If you owe money on your existing mortgage, this will have to be paid off as a condition of the home reversion scheme.

The amount the reversion company get when your home is sold also depends on the type of contract you have with them.

• Fixed-share contracts: mean the percentage of your home the reversion company own is fixed from the start and cannot change, no matter how long you live or the value of your property at the time of sale.
• Variable-share contracts: the longer you live the less of your property you own. With a variable share contract you can get a bigger lump sum of money when you first sell your share of your home but the percentage of your home the reversion company owns automatically increases every year and you will not get any other payments.