Equity release schemes are becoming an even more popular tool in retirement planning. An equity release scheme can provide a cash lump sum that can be used immediately or can be put toward supplementing existing income, such as pension income during retirement. Given their popularity, equity release schemes have grown very flexible, with a number of unique features attached to them in an effort to make retirement planning easier.
Equity release schemes were designed for homeowners aged 55 and over who wanted to release some equity from their property. They began as a way for homeowners to stay living in their home until the last homeowner either passed away or moved into permanent long-term care.
There are two main types of equity release schemes: lifetime mortgages and home reversions.
Lifetime mortgages are the more popular of the two types of equity release and account for more than 98% of all equity release plans written. A lifetime mortgage offers a level of flexibility as it provides a lump sum to you, the homeowner, but allows you to decide if you want to make any repayments against the balance. For example, you may elect to make interest-only payments on the loan balance, allowing for some level of control over the overall balance left on the loan. There are a number of variations, such as the interest-only repayment, that exist with lifetime mortgages. One key aspect of lifetime mortgages is that they allow you to maintain 100% ownership of the property.
Home Reversions have not maintained their popularity over time, particularly as lifetime mortgages became more flexible and allowed for more unique options. This product requires you to sell part or all of their home in exchange for an income, lump sum payout, or some mix of both. These products allow for a lifetime tenancy in the home, but you essentially become a co-owner of the property and do not maintain 100% ownership.
There are both advantages and disadvantages to using an equity release scheme. One of the biggest advantages is that they are a highly regulated product, protected by the Financial Conduct Authority along with the Prudential Regulation Authority. These policing entities oversee the rules of equity release schemes and the lenders who provide them. The Equity Release Council also promotes the safe guidance of these products. For example, the Equity Release council ensures that you have permanence of residence while using one of these schemes and provides a no negative equity guarantee for those who are concerned with protecting loved ones.