The Various Types of Equity Release Schemes
- February 26, 2014
- Jasper Kent
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Retirees can receive an extra monthly income in conjunction with their pension to help meet their needs. There are equity release schemes available that allow them to borrow money from the equity accumulated on their property. Lenders expect the property to have a certain amount of equity accumulated on the home before the retiree can borrow. Also, with the right equity release scheme, the retiree may be able to live in his or her home rent free.
Some of the equity release schemes include interest-only lifetime mortgages; roll up lifetime mortgages, and home reversions. With a roll up lifetime mortgage and home reversion, a retiree doesn’t have to make any monthly payments. In fact, the interest will still accumulate, but once you leave the property permanently or move into a home care unit, the interest will be paid off. With an interest-only lifetime mortgage, the interest must be paid while living in the home.
To be clear home reversion may not have monthly payments, but it also has no interest or loan payback amount. Instead with home reversion a person actually sells a bit of their home. The portion sold gains funds under value of the full value of the home. At the end of this scheme the house is sold in full and any portion left unsold during the homeowner’s lifetime will go to the beneficiary in the form of cash payment. The way you remain in the home rent free is with a lifetime tenancy agreement.
Lifetime mortgages require payment in full of the borrowed amount plus the interest. It is a matter of when this money is due that makes the difference between roll up and interest only lifetime equity release schemes.
Interest-only lifetime mortgages allow a retiree to keep their mortgage payments down. In fact, the retiree only pays the interest. Once the interest is repaid, then they can begin paying on the mortgage. By getting an interest-only lifetime mortgage, the property may be paid for before the person dies, so it will allow the property to be handed over to a loved one.
In most cases however the interest just keeps accruing through the lifetime of the person and the principle balance received remains unpaid until the death of the person or they move out and sell the home. This often leaves the property sold, but the potential for inheritance unlike other lifetime mortgage schemes.
In recent years there has been a chance to interest only lifetime mortgages. Many providers have made the mortgage due within 10 years. So if it is taken out at 65 then it must be paid back by age 75. It takes away from the true meaning of the mortgage lasting for a lifetime; however, worry of negative equity brought about this concern. The market changes often, thus new products can be coming your way.
Some of the equity release schemes require that a borrower be at least the age of 65, but with a roll up lifetime mortgage, you can be the age of 55 and over. The difference between an interest-only and a roll up lifetime mortgage is that with a roll up, your income doesn’t decide how much money you can receive. Even though, the interest will continue to increase each month, you can continue living in the home without making a single payment. The downside is that once you die, your loved ones may not be able to own too much of the property since there is an outstanding loan balance on it.
Staying in the Home
Depending on who you name in your contract for the equity release schemes, you may find that the house is in your family for several decades longer than a provider might originally like. The thing is any family member that is at the right age and named in the contract can stay in the home under the tenancy agreement or lifetime mortgage contract.
It is when the last person named in the contract dies or wishes to sell the house that the payments are made. Say you currently live in the house with your parent who is 75 and you are 55. Your spouse is 60. All three people can be in the agreement protecting the house from being sold until the last person dies. So if your spouse is gone first you are still able to remain in your property. This is one of the benefits of equity release schemes, and there are plenty of other benefits too.