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Equity Release Loans and Schemes - A Comparison Did you know that the over 60s in the UK have around £550b worth of equity tied up in their homes and yet nearly half of all single pensioners are dependent on State benefits? This is one reason that equity release schemes have grown in popularity in the last few years. However, taking out of these schemes is not a decision that should be taken lightly. It often makes far more sense to use other investments you have or consider moving to a smaller property or a cheaper area before thinking about equity release. Types of schemes There are three main types of equity release plan and they all have their advantages and their pitfalls so it's as well to outline how each of them works. Home Income Plans Sometimes known as Mortgage Annuity Schemes, these are probably the least popular of the lot as you're forced to buy an annuity with most of the equity released from your home. Essentially, you take out a loan that is secured against your house. You buy an annuity with most of it and use some of the regular guaranteed income to pay interest on the loan. The reason they're not so popular these days is because annuity rates are so low that it really only makes them worthwhile for those who are over 80 years old. There also used to be tax concessions, but these are no longer available. Cash Release Plans In this instance, you take out a loan secured on your house but, unlike the Home Income Plan, you can do as you like with the cash. Instead of making monthly repayments, the interest on the loan simply rolls up each year and is only repaid when your home is sold, either when you move into residential care or when you die. The interest rate on the loan is usually fixed, but will be higher than traditional fixed-rate mortgages because the company does not have the certainty of knowing when it will get its money back. Home Reversion Plans The increasingly popular reversion plans involve 'selling' a percentage of your home to a company, at a substantial discount, for a fixed sum or a monthly income. You retain the right to live there for the rest of your life. When your home is eventually sold on your death or on moving into care, the reversion company gets the agreed percentage of the sale proceeds - typically 50% - 75%. If house prices have gone up, the company gets the benefit of the increase. Some of these schemes may insist you maintain your home to a certain standard. Features of equity release schemes The crucial benefit of all three types of equity release plan is that you don't usually have to sell up and move out. The loans are repaid when you die or move into long-term care. Most schemes set a minimum age (usually 60), a minimum amount that you can borrow and insist that you have little or no mortgage outstanding on your home. A few warnings though: If you're receiving means-tested, Social Security benefits then any
extra income you get from an equity release plan may result in your benefits
being reduced. There are other important considerations too and you can find out more from Age Concern who have an excellent factsheet on the subject. As the industry is not fully regulated yet, it's advisable to use those companies which are members of the Safe Home Income Plans (SHIP) organisation as it means they agree to abide by a voluntary code of practice to safeguard homeowners. As these are fairly complex products, you may want to take some advice
from a fee-based Independent Financial Adviser so they don't get carried
away with suggesting a plan that pays them the highest commission. Using
your home to provide you with extra money in your old age needs careful
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