Equity Release

Overview:

Equity release is a process of acquiring a stable source of income, from the capital value of your house while maintaining the use of the house. The fine print is that the loan has to be repaid to the provider at a later time, usually at the time of death of the owner. So this is a perfect option for people above the age of 55, who have locked their capital in the house and who wish to use it fund the retirement. It is also perfect for senior citizens who do not want to leave large inheritances to the heirs.

Facets and features:

House equity release is of two types. Home reversion and Lifetime mortgages

Home reversion plans: The home owner sells a fraction or whole of the property to an individual or a reversion company. The reversion company provides a regular income which is tax free to the borrower who continues to stay in the property till his/her death even though they no longer own it. But with this equity release the borrower may only get 20% to 60% value of the property. Reverse option also allows the excess money from the release to be given to the heirs.

Lifetime mortgage release: The loan given on the property is used to generate an income for the borrower. The money is paid as a lump sum. Through the loan term, the interest is added to the capital. The amount is repaid when the home is sold after the borrower’s death or when the owner moves to an old age home. The debtor retains the legal ownership of the house along with the other costs and responsibilities of owning the property. But the problem with life time mortgages is that sometimes the accumulated and interest and capital adds up to more that the sale value. This could result in the company demanding the outstanding balance from the residual or remaining estate.

Because of these reasons, the equity release market has been brought under the limit of SHIP (Safe Home Income Plans), which gives numerous guarantees to the borrower. This ensures a no negative equity guarantee to the borrower where there is an assurance that the loan repayment amount will never exceed the value of the property.  All leading equity release providers are regulated by the Financial Service Authority (FSA), so that a fair deal is given to the borrower.

Payments and charges

The charges for equity release vary with the company. On an average the borrower is likely to incur an

·         Arrangement fee of 500£ to 1000£ usually a percentage of the loan.

·         Valuation Fee of 200£ - 500£ which is linked to the property value.

·         Legal costs 500£ to 1000£ each.

·         Administration fee of 150 to 300 pounds incase you decide to withdraw from the deal.

·         Insurance premium 200£ -300£ on the property.

·         Application Fee.

Ask the provider to break up the charges so that you can compare the deals given by different companies. Remember that you drive the deal. So don’t hesitate to do some research, because like every other financial product these are cleverly marketed.