Q: What is equity release?

By Emma Ann Hughes
Equity release is the process of releasing the wealth (i.e. capital) tied up in a person’s home without them having to move or make monthly repayments.
It is available to homeowners aged 55 plus.
An equity release scheme allows money to be raised from the equity in a property – either as a one off lump sum or an initial lump sum with a future credit limit.
According to LV, the property owners retain the right to remain living in their property until they die or move into care, and are also able to move house/downsize as an equity release loan is portable.
Equity release products are divided into two types of plan – lifetime mortgages and home reversion plans.
* A lifetime mortgage is a long-term loan against the value of a person’s home, and the money released through it can be taken as either a lump sum or accessed in instalments as and when required.
The loan plus the interest is generally only repaid upon the death of the last person in the case of a couple or upon a move into long term care.
There are different types of lifetime mortgage, including:
1) Roll-up – No monthly repayments are required, instead the interest charged on the loan (at a fixed amount) is rolled up – or compounded – so that it is added to the original loan and is then paid at the end of the term,
2) Drawdown – An amount is agreed and then the homeowner has the option of drawing down tranches of the money as and when they need it.
Interest is charged on the amount that has been drawn down only and is compounded, as with rolled interest.
According to Andrea Rozario, director general of Ship, the ability to take separate amounts at different times means this type of product offers greater flexibility, and might be used to supplement an existing income rather than for one single purpose (such as major renovations).
3) There are also various versions of lifetime mortgages that offer other features such as the facility to make monthly repayments or an option to take a larger sum if the client is in ill health, etc.
* Home Reversion plans involve the homeowner releasing equity through selling all or part of their property to a reversion provide with the right to stay in the property for the rest of their lives.
Individuals who opt for home reversions are still free to move if they should wish - as is the case with lifetime mortgages - with the reversion provider simply transferring the plan onto the new property (providing the property is deemed suitable).
As with lifetime mortgages the homeowner can choose whether they would like to take a lump sum or receive the amount in instalments.