By: Kevin Stelfox
There are many different types of Equity Release Schemes within the market which is referred to as Equity Release. There are two main types of Equity Release plan and these are broken down into different component parts. There are however certain principles which apply across the plans. The home owner releases an amount which bares interest but the capital sum and the interest is not repayable until the death of the home owner or the time where they enter full time residential care. Virtually all plans are offered carrying a SHIP guarantee, this states that there is a “no negative equity guarantee”. This means that even if the amount of loan plus interest is greater than the value of the property the Provider cannot force a sale of the property until one or other of the events detailed above occur. This is a significant piece of mind issue for Equity Release customers
Equity Release (Lifetime Mortgage)
These types of plans allow home owners who are over 55 to release Capital from their Residential privately owned property. The Equity Release provider requires the first charge on the property as a traditional mortgage company would. However the home owner retains ownership of the property. This means that the plan can be effected on properties where the mortgage has previously been paid up in full or where the amount outstanding is low enough to enable the Equity Release advance to clear the outstanding mortgage amount. These types of plans make up the vast majority of the Equity Release Market, accounting for over 90% of all business volume.
There are three types of plan within the Lifetime Mortgage Market. The first is the Lump Sum Advance. This allows the consumer to release a % of the value of their property, based on their age at inception of the plan. They release a sum and as the name suggests they take the amount in one lump sum. The second is the Drawdown Plan, this allows the consumer to have access to a “pot” of money which is ring fenced for them. For example if the property is worth £200,000 and the % the consumer can release is 30% then the pot is £60,000. The client could take £20,000 as a lump sum and then can request the remainder in their pot as and when they need it until the pot is exhausted. A key benefit of this type of plan is that interest is only accrued on the element which has been drawn down, and not the total pot size. The third type in this category is a plan which pays a monthly Income figure to the applicant based on a pot that is based on there age at inception and future actuarial calculations.
Home Reversions
This is the second major type of plan within Equity Release. A reversion differs from a lifetime mortgage in that the home owner surrenders ownership of their property to the provider for a lump sum. The provider will offer the applicant a lump sum based on the value of the property and the clients age and in some instances the health of the applicant. The provider in effect takes ownership of the property and the applicants receive a sum of money and a tenancy for life. The loan is not repayable until the death of the applicant or their entry to full time residential care. This type of plan will yield a higher % advance than a lifetime mortgage however there are some disadvantages. The main disadvantage is that the applicant loses ownership of the property to the provider. A worst case being that an applicant takes a reversion amount of £80,000 on his property worth £200,000, unfortunately he dies one month later, the provider has full ownership of the property. There are now schemes which allow a % of the property to be retained in ownership by the applicant. In this instance they take a reversion amount which is lower than that available under full reversion, however they retain 10% ownership of the property which can be left as part of their Estate.
Sale and Rent back
There is another product on the market which is sometimes given the label Equity Release, although it is not strictly Equity Release as the above products are. The product is best known as Sale and Rent back but historically it has been sometimes put with the Equity Release products because quite literally it allows people to release equity from their property. In many cases the applicants are in financial distress and the transactions can be effected very quickly. The provider will offer the applicant a sum of money in exchange for ownership of the property, they then allow the applicants to live in the property as tenants in the usual manner using an Assured Shorthold tenancy agreement. Some plans allow the applicant to purchase the property back in the future. This industry has always been separate from mainstream Equity Release and until July 2009 was not regulated by the FSA.
About the Author
Kevin Stelfox is Sales Director of Retirement Solutions an independent financial adviser that specialise in equity release and gives independent financial advice on all equity release schemes.
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Article Source: http://www.articlesbase.com/ – The Different Types Of Equity Release Schemes
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