Which Types Of Equity Release Schemes Are There?
Equity release schemes can be broken down into two main categories – lifetime mortgages and home reversion plans. From there lifetime mortgage plans can be subdivided into further categories of lending types which explains why the lifetime mortgage is now the most popular format for equity release schemes today.
In fact, lifetime mortgage schemes can be further subdivided into additional categories due to the level of innovation this particular type of equity release scheme has enjoyed. The following are the four different branches of the lifetime mortgage plan: –
1. The Drawdown Lifetime Mortgage
– these schemes work by the lender providing the homeowner with a total cash reserve facility from which an initial lump sum is withdrawn. The monies not taken are left behind in the reserve facility, held by the equity release company & not charged interest whist sat with them. Should the homeowner need further funds anytime in the future they can make a request to the lender advising how much extra cash they require. This can be anywhere from as little as £1,000 upto the remaining funds held in reserve.
With usually no further costs incurred, the lender will ask for some signed paperwork & once returned the requested funds can be in the homeowners bank account within 10-14 days. This drawdown process can continue until the whole cash facility has been utilised. At that point if further funds are required then the application would turn into a additional borrowing & further fees & separate process followed.
The advantage of drawdown lifetime mortgages is the flexibility of taking money as & when required. By only taking what’s required, the homeowner is only charged interest on funds withdrawn which will save on interest over the longer term.
2. The Enhanced Lifetime Mortgage
– based on the principle of a lump sum equity release scheme, enhanced lifetime mortgages use the premise of life expectancy in determining the maximum equity release that can be borrowed. By asking for a health and lifestyle questionnaire to be completed, the lifetime mortgage company will assess the applicants medical records & should there be a history of poor health that could reduce life expectancy, they could increase the maximum amount that can be borrowed.
This would suit individuals who either wish to enjoy the rest of their retirement to the maximum, or those needing the maximum release to clear outstanding mortgages or debts incurred that all need to be repaid. The enhanced lifetime mortgage can also work in the opposite manner in that if the maximum equity release isn’t required, then the interest rate can be reduced. Another benefit proving popular with borrowers.
3. Lump Sum Schemes
– as the title suggests this form of lifetime mortgage is simple in nature as it merely offers a one-stop shop in providing a single tax-free lump sum to the homeowner. There usually isn’t a need for further borrowings & as a consequence this usually results in a lower interest rate. However, additional borrowings can be applied for in the future should the need arise, however additional costs will invariable be applied by the lender.
Interest Only Lifetime Mortgages
– allow the control of the future lifetime mortgage balance by paying off the interest charged each month, thereby rendering the balance level for the duration. Some schemes such as Stonehaven’s Interest Select Lite will permit a premium of anywhere between £25pm, upto the full amount of interest charged. Deciding how much is to be repaid will ultimately determine the future balance of the plan.
By opting to repay the full amount, as stated earlier will pay off the interest charged monthly & keep the balance level, thus preserving any inheritance. However, if a lower monthly payment was selected then an element of roll-up of the balance will occur, albeit less than would otherwise have been should no payments have been made whatsoever.