Equity Release

There are two basic ways in which value can be released from the home bu 'equity release'.

Lifetime Mortgage

A lifetime mortgage is a regulated mortgage contract usually aimed at mature home owners who wish to increase either capital or income - or both - using their property as security for the mortgage arrangement.

A customer takes out a lifetime mortgage on the property's value whilst, importantly, retaining ownership of the property. The interest rate chargeable on these arrangements, usually fixed or capped, is invariably higher than on standard mortgages.

A Lifetime mortgage is usually a roll-up mortgage (roll-up means interest is added to the loan, for example each year but no payments are made, or required, to reduce or repay the loan).

The value of the debt owed by the customer can grow rapidly, which means these arrangements are potentially high risk. For example a roll up loan taken out at age 60 with an APR of 7% could nearly double in 10 years and quadruple in 20.

The customer generally makes no repayments on the loan and the interest is rolled up until repayment occurs e.g. the customer moves property, goes into long-term care or dies.

Home Reversion Plans

The Home Reversion method of releasing equity requires a part or all of the property to be sold to the reversion company. They will pay out a cash sum at the start of the plan in exchange for an agreed percentage share in the ownership of the property. On death, or when the property is permanently vacated, it is then sold and, if only a proportion of the property was sold, the proceeds are shared as appropriate. The occupant(s) retain the right to inhabit the property until permanent vacation.