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A Look at Equity Release Schemes in the UK.

While many of us undoubtedly look forward to the golden years of approaching our pension age, the truth of the matter is that these programmes may not always give us the financial liquidity that we need. A opposed to taking out a standard loan, one useful alternative to consider is employing what is known as an equity release. How do these unique plans operate and what are some of their main benefits to keep in mind?

The Basics

The main concept behind equity release schemes is the ability for you to liquidate any wealth that is tied up in your property. You can sell a portion of your property for a lump sum (or for monthly payments). You also have the choice of borrowing against the book value of the home itself (a home retention). In either of these cases, the main intention is to provide you with the liquidity that may be lacking otherwise. Let us now look at these two options in a bit more detail.

Lifetime Mortgages

As the name hints, this unique plan allows you to borrow a certain amount (provisional limits are stipulated by the provider) of money against the value of your home. Unlike a normal mortgage, these funds will not be paid back by you. The total amount (and any accrued interest) will be settled when you pass away or when you decide to move house. You can choose one lump sum or to be paid out in quantifiable instalments.

Home Retentions

This option is slightly different, as you will be able to draw against the value of your home. In this case, you will sell a percentage of your home to a third-party provider. You can then borrow funds against the portion sold. You may also choose to sell off a further percentage down the line or leave what you own to a family member in the form of a will. The main concept to remember in terms of a home reversion is that this type of equity home release dictates that the property will be sold at the end of the agreement (to recuperate the funds) and it is your responsibility to maintain the value of the home. Let's now look at the benefits and drawbacks of these options.

Advantages

We should first note that any of the funds released will not be subject to taxation. This is normally in direct contrast to many existing retirement plans. There may also be times when you can lessen your obligations in terms of any inheritance tax that may need to be paid on your estate. Should the value of your property decrease over time, you will not be obliged to “make up” for the difference. Finally, we should touch upon the concept of interest rates. Most of these plans are attached to variable interest rate schemes. Why is this important? Should the national interest rates be set lower by the Bank of England, you will be able to renegotiate the plan in relation to these rates. In the end, this signifies that the lump sum paid back may very well be substantially less.

Drawbacks

It needs to be mentioned that the interest rates attached to an equity release mortgage are normally much higher than those associated with a regular mortgage. There are also times when one may borrow too much against an existing property. This could prove problematic if surprise expenses come to pass in the future.  There can also be instances when the funds received may counteract your ability to enjoy state benefits (depending upon the levels). It can be tough to move home (particularly in regards to a home retention plan). There are also substantial arrangement and legal fees associated with either of these packages. Finally, there are normally stiff penalties if you decide to back out of the contract early; these can further eat into what may prove to be limited funds.

Making the Best Choice

Of course, it is always wise to seek the advice of a trained professional who specialises in this area of finance. You will need to take into account how much money you think you will need after you reach the age of 55 and if any residual funds from other sources (such as stocks, bonds or similar investments) are expected to come in. In terms of selecting the right provider, there are a handful of questions that should always be asked which can include:

  • Is the company in question registered with the Financial Conduct Authority (FCA)?
  • What are their associated fees and is there an early termination penalty?
  • Do they favour one product over another and if so, why?
  • What are the interest rates that are charged and will they be fixed or variable?
  • Are there testimonials available to read upon request?

 

These are some of the most important queries that should always be made before committing to one plan over another. With a bit of research and by seeking sound advice, these schemes can be powerful tools that will add a bit of liquidity back into your lifestyle.

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