In recent years equity release schemes have become a popular method of extracting cash from property. And with property values experiencing large increases in recent years it is no surprise that individuals who invested in property during the mid '90s are capitalising on its current value.
How does it work?
Equity release schemes are generally available to individuals who own their own property and are aged 55 and over. They essentially work by giving a homeowner a loan on the value of their property, with the loan being delivered on a monthly basis or as a lump sum, while the house continues to be occupied.
Lifetime mortgages
With a lifetime mortgage homeowners are able to release a lump sum of their property to spend. The interest tends to be higher compared to a standard home loan and is left to accumulate over the period of the agreement.
The major benefit of this type of plan is that ownership of the home is still the policyholder's so any growth in value belongs to them, although the amount owed on the loan can build up rapidly.
Home reversion plans
This form of equity release involves homeowners agreeing to sell a percentage of their property in return for money. When the homeowner or surviving spouse dies, the company receives the agreed proportion of the sale proceeds.
By participating in a home reversion plan, homeowners will continue to share benefits of any rise in value of their home and, depending on the percentage sold, have the opportunity to increase their cash advances.
Is there a catch?
As with any scheme there are pros and cons. Equity release offers individuals the opportunity to use the value of their homes as a way of securing additional income, but in reality homeowners risk giving up a large slice of their equity in return for a small amount of cash.
In addition, equity release schemes will reduce the value of your estate and could affect any entitlement to means-tested benefits and grants.
It is important that people considering entering into a plan fully understand the implications and go through them with a specialist adviser.