A few decades back, when a person retired, he / she did not have to worry much about expenses and how to meet them. The average amount of money that a working individual could save was enough for the retirement years. With the increase in the cost of living and the lack of a proportionate increase in the family income, it has become a difficult task for retired people to make ends meet.
The situation is a bit easier for the home owners. They can release the equity on their home and use the cash received for their other expenses. Equity release plans are a way through which older home owners can unlock a part of the money tied up in their property and get some tax exempted cash. The equity release schemes are of two kinds – life time mortgages and home reversion plans.
Life time mortgages are the most popular plans and the majority of those who are going for equity release are opting for this. Under this plan, you would take out a loan on your property which will be paid off after the death or removal of the last surviving partner to a retirement or a care home. Thus there won’t be any monthly payments to worry about. After your demise the equity provider would sell the property, take their share and give the remaining amount to the rest of your family.
There are several benefits of this plan. You can release the equity on your property even at the age 55. If there is any price rise in the real estate market in the mean time, then you will benefit from it. You will get a fair estimate of the amount you can expect to receive from the scheme. Your property might generate enough money to leave some for your family and pay off your mortgage.
However, there are some disadvantages that you have to consider. The interests are compounded and thus the debts keep mounting. Therefore, you might not have any money left for your heirs after paying off the mortgage. You cannot pay off the debt before time. If you do, then early repayment charges will be applicable. Equity release on property may also disqualify you for any government pension grants.
The other equity release plan is the home reversion plan. Under this plan, you can sell the entire or a portion of your home to a home reversion company. When you sell part of it, the other part will be held in trust for you. When you sell to a reversion company you will get lump sum cash from them and the right to live in your own home rent free. After your death or removal to a retirement home, your property will be theirs. If you sell part of your home then they will sell that part and pay off the mortgage. The remaining will go to the trust. One major advantage is that you will know the exact amount of money that you are leaving for your heirs. But then you will become a tenant in your own home.
Jonathan is a freelance financial adviser. He has recently started writing articles and blogs. Here he talks about the advantages and disadvantages of the equity release on property plans.