ffHow to release equity from your home

Inflation is rising, house prices are falling, unemployment and business failures are on the increase and a combination of a mortgage shortage, overpriced houses and government dithering have caused the property market to practically dry up. It is hardly surprising that repossessions are reaching record levels as homeowners struggle to make ends meet.

In addition, thanks mainly to better nutrition, health care and living conditions the number of people aged over 60, or even 55, who have retired from full-time work but who still want to live life to the full is increasing, and long may it continue to do so. Unfortunately in the majority of cases their incomes do not match their financial needs and quite a large number have taken on debt commitments, for reasons as varied as paying for a well earned luxury holiday, to helping grandchildren get their first steps on the housing ladder.

Over the last decade property values have increased by one of the highest rates on record, and in many cases both those who have fallen behind with mortgage repayments and face losing their homes as a consequence, and those older people who have perhaps paid off their mortgages years ago but who need a higher income, may be sitting on a large slice of equity in their homes, and it is hardly surprising that releasing this equity has become so popular. Two main schemes have emerged, known as equity release and sell-and-rent-back, and although both of these methods allow homeowners to cash in on some of the value of their homes, they are entirely different with different advantages and disadvantages.

Equity release

Briefly, the idea behind equity release is that a financial institution, often an insurance company, either buys a house outright or advances a mortgage on it, on the understanding that no mortgage payments will be expected from the owner throughout his or her lifetime. Upon the death of the owner the property would be sold and the lender would recoup it's investment at this stage. Obviously there has to be a time limit on a transaction of this type and so equity release schemes are normally available only to people over the age of 55, and since there will be no repayments made during the life of the scheme interest charges will continue to mount up and could very easily exceed the sum which was originally paid out, several times over. As a result the lender will only pay out a small proportion of the equity in the property, and in practice this seldom exceeds 30% unless the owner has a short life expectancy. Equity release schemes are normally taken up by mature people over the age of 55 who want to release a little extra money, and who are comfortable with the fact that there will be a lot less in their estates for their heirs to inherit.

All information on this site is meant as general information only and is not intended to be seen as advice on any person's financial, investment or tax affairs. You are strongly urged to seek  advice from an Independent Financial Advisor for any aspect of your financial affairs that you are not familiar with.

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