What is an equity release?

Equity release is a scheme that lets you raise a sum of money from your property’s equity either in a lump tax-free sum or in the form of regular weekly or monthly income. The advantage of equity release is it allows you, and your partner to remain living in your house until both of you die and move out. For this reason, equity release schemes are particularly popular among retired people, usually aged over 55. Currently, there are three main types of equity release schemes available in the market, with several variations of each. The most reputable providers are registered with the Safe Home Income Plans – a consumer protection organisation that protects consumers and represents the interest of the leading providers of lifetime mortgages and home reversion plans. Although, the schemes differ in some ways, most of them work by giving you a loan on the value of your property.

Different types of equity release schemes.

• Home reversion plan is a form of equity release in which you sell a share in your house to a reversion provider but retain your right to live in the house free of charge until you die or move out. It is a safe method of raising finance as the reversion provider will not be able to sell your house until you or your spouse both die or move out. The equity can be paid out either in a lump sum or in accordance with an agreed payment schedule. The only disadvantage of this method is that you are unlikely to ever receive personally a full value for your property as the equity release company might have to wait long time before they sell your property and make a profit out of it.
• Lifetime mortgage is essentially a loan secured on your property. You do not have to pay normal monthly mortgage repayments. The full amount along with any accrued interest is deferred until the end of equity release scheme. You can continue to live with your partner in the property. After you and your partner have died or moved out, the house will be sold and the amount you borrowed, including any interest will be paid back to the lender. Any surplus will pass to your or your partner’s estate and be distributed in accordance with your will or the rules of intestacy, should you or your partner die without leaving a valid will.
• Home income plan is really a variation of lifetime mortgage. Under this scheme, a cash sum is released from your property and is used to buy an annuity that later on provides you monthly income. In order to benefit the most from home income plan ensure that you negotiate the best annuity rates available and obtain advice on enhanced annuity rates; these are only available if you meet certain criteria.

How much will I get?

Equity release companies tend to pay from around 20% to 60% of your property’s value. The percentage largely depends on the value of your property and your age. The older you are the more equity release providers will be willing to pay. Therefore, if you decide to sell 100% share in your house that has a market value of £200,000.00; you will be likely getting from £40,000 to £120,000.00.

Are there any alternatives?

As you can see with equity release scheme you might not get the full value for your house. For this reason, it might be worth discussing your decision with family or friends who might be willing to provide you with a loan in exchange for inheritance.

Are the current economic conditions forcing pensioners into equity release ?

Pensioners have been particularly hard hit by the double whammy of low interest on savings coupled with high and rising costs for basic necessities such as food, electricity, heating and the reduction is budget for care needs. This is backed up be research from Prudential, which finds that the cost of living is rising almost 50% faster for pensioners than the current rate of inflation.

The average pensioner apparently has around £20,000.00 of savings but need this for simple day to day living costs.

It is always important to think carefully before raising funds through an equity release scheme due to the fairly prohibitive interest rates applied to these types of loans.

However, if you are over 60 and have a need to access funds, a new product on the market may be worth lo9oking at.

Insurer Partnership has made available a new equity release scheme which involves some reasonably straightforward medical questions being asked but which, depending on the results of those questions, and underlying health conditions, may allow a person with possibly worse health problems (and therefore life expectancy) to withdraw a higher proportion of equity from the property.

Th is scheme also has the potential advantage that interest on the loan does not need to be paid monthly but can be rolled up. Again, there are definite pro’s and con’s to this which should be carefully considered.

In terms of figures, the scheme might allow a 60 year old person with a potentially significant condition such as diabetes to borrow an additional 5-6% of the equity over and above the usual amounts of around 20% of the property value.

Some good news at last for landlords, according to data released by Countrywide, one of the largest letting agencies in the UK with1,300 offices nationwide.

They advise that in the first quarter of this year, it is taking, on average,  13 days to let a property whereas in the corresponding quarter of 2010, it took, on average 17 days.

In addition, there has been a  51% increase in demand for property from tenants at the start of this year start compared to 46% at the beginning of last year.

The data also suggests a general  shortfall in available rented property, with an average five tenants competing for each property, especially in London, where house prices and mortgage unavailability are undoubtedly fuelling the rental market.

Al in all, good news for buy-to-let investors in terms of income steam, especially with interest rates remaining at historic lows. The position on capital values and appreciation is another matter entirely however.