Equity Release schemes include lifetime mortgages & home reversion

Equity release schemes and their close relatives, sell and rent back schemes, are both ways of increasing the funds available to people in retirement.  While both are legal and both are regulated by the FCA, signing up to one of these schemes can have significant implications, and anyone thinking of doing so would be well advised to seek unbiased advice from professionals, such as financial advisers.

Equity release schemes come in two basic forms.  By far the most common is the lifetime mortgage.  With this scheme, the equity in your home, or a portion of it, will buy you a cash sum, an income for life or a combination of both.  The main difference between equity release lifetime mortgages and normal mortgages is that the interest is deferred until death, or until the home is sold.  However, interest is compounded throughout the term of the loan with the knock on effect that the sum repaid to the equity release company can be substantially higher than the amount originally borrowed.

The other option is home reversion schemes, you exchange the ownership of some or all of your home for a lump sum of cash, and the right to remain in the property, free of charge, for as long as you live and you can continue to live in your home, rent-free, until death. These schemes are still very unusual in the UK.

Sell and rent back schemes have become more prevalent since the recession started and involve companies buying properties for below their market value and then renting them back to their original owners.  Assured Shorthold Tenancies for 6 to 12 months are typically put in place at the time of purchase.  While in theory, these tenancies can be extended, there are usually no guarantees of this, or that the rent will stay the same.  These schemes are unlikely to provide the security that people want that they can remain in the home that they may have lived in for many years.

Signing up to any of these schemes can also have implications for your other financial arrangements, for example they may leave you over the threshold for means-tested benefits.  It is therefore absolutely vital that anyone contemplating signing up for any of these schemes fully understands all the possible consequences.

It is equally important to consider all the alternatives to these schemes, for example, selling the house.  This then raises the question of where else to live and whether it would be best to buy or to rent.  Taking advantage of the government’s rent-a-room scheme may be another option.  This allows people to earn up to £4,250 a year tax free by renting out a room in their home.  Those who are looking to raise funds to adapt a home to make it more suitable for people with reduced mobility may find that they are eligible for financial assistance.

Post courtesy of Social Advisers