According to statistics from the Equity Release Council, Equity Release sales in 2015 hit a record high of £1.71 billion. So why is this market growing 29% year on year and is this really the best option for homeowners seeking a lump sum or monthly income ?
Over the next 30 years an estimated £2.6 million interest only mortgages are due for repayment. With an estimated average shortfall of £71,000 lenders are stepping up their warnings to prevent payment shocks. This ticking time bomb has given the Equity Release market a shot in the arm with more and more homeowners aged over 55 turning to Lifetime Mortgages and Home Reversion Schemes.
Regulation as tightened up and safeguards are now in place to protect borrowers, but before the ink drys on your signature make sure you fully understand how these plans work.
Equity Release, put simply, is when you use the equity in your home to provide you with either a lump sum or a monthly income. The borrowers have the right to remain in their property for life or until they move into long term care. At this time the lender can them reclaim the money back plus agreed interest or charges.
The two types of Equity Release are Lifetime Mortgages and Home Reversion Schemes. Lifetime Mortgages is a secured loan on your home paid either as a lump sum or as a monthly amount. You are charged interest on the amount borrowed so the longer you live the more that needs paid back when you die or move into long term care. Most policies should come with a no negative equity guarantee so you should never be in a position where more money is sought after a house sale. Terms and condition do apply though so make sure this is thoroughly discussed with your solicitor before proceeding.
A Home Reversion Scheme is where you sell your home and it is leased back to you. When the property is sold, the reversion company will take the agreed amount. If there is any left, it will paid to the estate. In this instance, you’ll only receive a percentage of the market value of your home as the company may have to wait for years to see its money.
There are other important factors you should think about before you sign on the dotted line. Consider your inheritance plans for children and grandchildren. Depending on how long you live all your equity could be eaten up by such a plan, significantly reducing the inheritance going to your loved ones. As such, you would be well advised to chat with your family first so they understand how such a plan will impact the estate. At the same time it is worth ensuring they fully understand the benefits of such a plan and how it could help you financially in your retirement. A lot of the safeguards that are in place now prevent many of the problems previously associated with Equity Release. Whatever you decide it is always worthwhile getting independent, expert advice from FCA regulated Equity Release specialists as well as your own solicitor.
