Equity release

Equity release plans allow you to access some of the value tied up in your property, either as a lump-sum payment or a regular income stream.

However, equity release is not always easy to understand and many people have a number of questions about how the plans actually work.

A home reversion plan involves you using just a part of your home's market value, say 40%, to raise money. There is no interest to pay during the plan, but when it ends, the lender is entitled to 40% of your home’s then current value. The value of your home is likely to have increased by that point of course and this means that your family will be able to inherit 60% of what your property is worth, minus any sales costs or inheritance tax that would be due.

The downside of this is that you will not be able to raise as much money as if you used all of your home for equity release.

The most popular type of equity release plan is called a lifetime mortgage. Here, instead of the capital borrowed, plus interest, being paid off monthly, these costs roll up and are repayable when you die or move out of the property.

Unlike with a home reversion plan, the equity release company would not own any part of your home. Like any other mortgage agreement, there are still rules that you have to follow as regards maintenance and alterations to the property, all designed to protect the equity release company’s financial interest in your property.

Even at the end of an equity release plan, the provider has no right to the actual property, it only having the right to be paid whatever sum it is owed at that point.

If the beneficiaries of your estate have sufficient funds, for example from other assets in the estate, they should not be forced to sell the home if they do not wish to.

Most plans have drawndown facilities, which is the ability to take a further loan on the value of the property. Drawdown allows additional sums to be taken on a one off or more frequent basis. It doesn't mean that you receive a guaranteed income for life. The value of your property, among other factors, will limit the total amount you can take, but often taking a second loan is perfectly feasible, particularly if the value of the property has risen since the first loan was taken out.

One advantage of this approach is that you are only charged interest on the money you have borrowed. If you borrow less to begin with the interest will accrue on this lower amount than it would on a larger lump sum payment.