Home equity release is a financial plan that can give you extra cash in your old age. It acts as a mortgage taken out based on the value of your house. In return, the institution that lent you money can sell the house to recover the amount when you do not live in it anymore.
There are different types of equity release schemes that are available to suit different people’s requirements. These include:
• lifetime mortgage
• home reversion
• interest-only
• shared appreciation mortgage
• home income plan schemes.
The lifetime mortgage scheme is the most basic of the equity release schemes. It is offered as a mortgage to you whereby it is secured on your house. Payment to you is made mostly in a one-lump sum. Repayment is calculated based on compounded interest and will be paid together with the mortgage when the house is sold. This scheme allows you to keep ownership of the house as long as you are staying in it. In the meantime, no payment whatsoever is required to repay the mortgage. However, with compounded interest, the total amount owed can become a lot very quickly.
Another popular equity release scheme is the home reversion scheme. This scheme is taken up when you sell all or part of your house to a reversion provider. You are able to receive a significantly higher amount of cash compared to the lifetime mortgage scheme. This can be given to you either in a one-lump sum or as monthly payments. However, since all or parts of the house have been sold off, the rights of that whole or partial part of the house are forfeited along with it. As this scheme is not considered as a mortgage, no monthly repayment is required.
The interest-only scheme requires you to repay the interest only every month. This scheme is similar to the lifetime mortgage scheme. The only difference is that only the mortgage amount is repaid when the house is sold since the interest had been repaid throughout the mortgage tenure. As the mortgage amount is based on the value of the house at that particular point in time, any rise in the house’s value in the future will not be added into the mortgage amount and will be considered to be yours.
For the shared appreciation mortgage option in the equity release schemes, the lending institution puts a stake in the increase in any future value of the house. In return, a fixed amount of cash is given to you. When the house is sold, the mortgage principal is repaid together with the agreed-upon percentage of the increase in value. This scheme also does not require a monthly repayment. This scheme is beneficial if either the increase in value is not a lot or if the mortgage tenure is short. If there is a sharp increase in value, the repayment may become quite a big figure.
The home income plan scheme is also one of the equity release schemes. This scheme is a combination of a mortgage and an annuity. The mortgage is taken out and used to buy an annuity. The monthly income received from the annuity is then used to automatically pay the monthly mortgage interest. This saves you from having to worry about the mortgage repayments for as long as the annuity is in effect. However, because the mortgage taken out will be used to purchase an annuity, this scheme will not be able to offer the payment of one-lump sum for use.