There are several different strategies to perform a home equity release, all of which allow a borrower to make their home work for them. By using an equity release, homeowners are able to provide a steady stream of income for themselves by making use of the money already invested in their home.
A home equity release is very similar to a reverse mortgage except that the cost of an equity release tends to be much cheaper. During an equity release, the borrower is not required to repay any portion of their loan each month.
There are several different equity release schemes, but there are three that tend to be used most prevalently. These are Lifetime Mortgages, Shared Appreciation Arrangements, and Home Reversion Plans. Under each of these schemes the homeowner is allowed to stay in the property until it is sold. The fact that the borrower does not have to move or relocate is often a significant benefit for those individuals who want to try a home equity release scheme.
This is a product that allows you to retain ownership of your home. You take out a specific amount of equity with the intention of paying it off later upon your death or removal to a home care facility. The payment method can be through the sale of the house. Under lifetime mortgages you have three options: roll-up, drawdown, enhanced, or interest-only. Each has a special caveat that makes it different from the norm. For example an enhanced scheme is attained when your life expectancy is significantly shortened, allowing more equity release. Drawdown sets up a payment instalment where you take out only what you need. Interest-only means you pay interest on the loan prior to repayment leaving only the principle balance. The roll-up scheme is the standard lifetime mortgage.
Reversion is a partial sale of your home. You can also sell the entire home. You do not owe money to the provider because it is not an actual loan. You have sold the home, but with an addendum stating you have the right to reside in the house until death or removal to a care facility. This type of home equity release requires a lifetime tenancy agreement.
Shared Appreciation Mortgages
Shared appreciation mortgages or SAM plans use a lender that agrees to accept a partial or full payment based on the increase of value in the home. This is a shared arrangement in which you may leave behind an inheritance based on the share you retain after payment is made to the lender from the increased value in your home. The idea is that the property is going to increase in value so much that it will cover the loan during your lifetime, any interest accrued, and leave a share for your beneficiaries.
Benefits of Equity Release
There are several other advantages to using equity release.
• The most relevant of these is that it provides for a steady source of income for the borrower. They are allowed to extract the equity from their home, thereby giving themselves income each month.
• The second benefit is that the owner is allowed to live on the premises, even though the ownership of the property is possibly shared between the borrower and the lender.
• The upfront costs are also usually lower than many other alternative mortgage schemes.
• Lastly, there is no repayment of the loan back to the lender or creditor depending on the home equity release. The money owed on the loan is only repaid to the lender once the home has been sold.
Disadvantages of Equity Release Schemes
There are also a few disadvantages to using a home release scheme, which are shared below. They are general disadvantages and may not apply to all schemes available to you.
• Firstly, the home is almost always sold once the borrower has passed away. This eliminates the possibility for the house to be passed down to another generation or family member.
• Secondly, the ownership of the home is shared with the lender under a home equity release. Therefore, if the home appreciates, the lender reaps the benefit of the increased appraisal amount.
Several individuals have found a home equity release scheme to work very well for them as they are able to produce a steady stream of income for themselves simply by using the equity already invested in their home. It is imperative to compare and shop around for the best fit in release plans.