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The Equity Release Market

Mar 17, 2008
Equity release is a way for homeowners to release cash from the equity that has built up in their home. Equity can be defined as the difference between the value of a property and the balance of the mortgage, or any other finance, that is secured on it.

There are several different methods of equity release available to homeowners. This can include releasing all or part of the equity they have built up in their properties either as a lump sum, a drawdown facility, or as a steady cash flow over time. There are two main types of equity release plans - lifetime mortgages and home reversion schemes. Both of these schemes are only available to home owners who have built up a sizable amount of equity in their properties.

A lifetime mortgage is a form of equity release whereby a mortgage is secured against a person's home after redeeming all other finance secured on it. The equity release can occur as either a lump sum, a drawdown, or as a regular income over time.

With this form of equity release, no interest is payable during the term of the lifetime mortgage. The interest payments will instead roll up into the balance of the loan. The balance of the loan is repayable when either the property is sold or the homeowner moves into long term care.

Home reversion schemes, on the other hand, are a type of equity release that requires the homeowner to sell all or part of their property to the scheme provider. The homeowner will them receive a lump sum payment as their equity release and will usually continue living in the property whilst paying a minimal amount of rent. When the property is eventually sold the reversion scheme provider will take their share of the proceeds and pay the balance to the homeowner or to their estate.

The equity release market is expected to grow considerably over the next few years. As more and more people become concerned that they have not saved enough money for retirement they are looking to their home as an asset that could potentially provide the funds required.

Homeowners have benefited from many years of above inflation growth rates in the property market and have therefore accumulated large sums of in their homes due to natural appreciation that they can put to use through an equity release scheme. Many homeowners have also paid of all or most of their mortgages, providing even more releasable equity. While this does build up personal wealth, it does not provide cash to pay for things unless the equity is released through one of the schemes detailed above or the house is sold.

Equity release schemes can have an impact on state benefits and inheritance tax. It is therefore a good idea to talk to an Independent Financial Adviser or mortgage adviser before entering into an equity release scheme. For mortgage advisers to provide advice on lifetime mortgages they must complete a special qualification. This helps to ensure that their clients receive expert advice on this topic as equity release is a serious action to undertake.
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