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Category: Retirement Date: 6/11/2008
In the UK house prices have risen significantly more than incomes over the last few decades, meaning that many people are faced with the situation where they have a high wealth but a low income. This is why equity release schemes from companies such as Norwich Union and Prudential have risen in popularity as ways to convert this wealth into income. Equity release schemes have received a lot of bad press recently - not only can they be expensive, but if you're not careful you may only get a fraction of what the house is worth.
There are two main types of equity release schemes or equity release mortgages as they're sometimes called:
Lifetime mortgage.
Lifetime mortgage equity release schemes are currently the most popular form of equity release scheme, where you borrow a set amount of money against your home in the form of a mortgage. There are no monthly repayments and the loan is repaid either when you die or move home. The cash you free up from your home is then received either as a lump sum or as a plan that allows you to take it out as and when you need.
Lifetime mortgages have the benefit of letting you continue to legally own your home, allowing you to benefit from any increase in house prices, you know how much you'll receive at the outset and you may still be able to leave some equity in your home to pass onto your heirs.
The main drawbacks with lifetime mortgages are that the mortgage debt will grow over time, as interest is added and compounded, you could use up all of the equity, you may incur early redemption charges if you repay the lifetime mortgage and your tax situation may be affected in terms of eligibility for means tested benefits. Home reversion.
Home reversion equity release schemes are where you sell part or your entire home to a 'Home reversion company', in return for a lump sum or an income for life policy. Legal ownership of the property is transferred to the Home reversion company with any remaining portion of your property you haven't sold, being held in trust. You can remain in your home rent free for the rest of your life. When you pass away the Home reversion company sells the property and gets 100% of the proceeds if you have sold all of the property to them; otherwise the value of any portion of the property that you didn't sell to the Home reversion company passes onto your estate. The main benefit of some flexible home reversion equity release schemes are that you can release the right amount of equity for today's needs, while having the flexibility of releasing further equity as and when required in the future. You can also leave a fixed portion of equity for your heirs. The major drawback to home reversion equity release schemes is that you are transferring legal ownership of your home to the Home reversion company and in effect are becoming a tenant in your own home. This means that the Home reversion company will benefit from any rise in house prices, not you or your heirs. Your tax situation may be affected in terms of eligibility for means tested benefits.If you're still unsure whether an equity release scheme is the right thing to do, then it's worth reading the FSA's guide to equity release schemes. Because of the impact on you and your family of taking our an equity release scheme, most equity release scheme providers insist you consult either a qualified financial adviser or a solicitor. There are also other ways of reducing your outgoings or increasing your income, which are worth considering when thinking of taking out an equity release scheme.
Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at anytime.