Equity release
Encyclopedia
Equity release is a means of retaining use of your house or other object which has capital
value, while also obtaining a lump sum or a steady stream of income
, using the value of the house.
The "catch" is that the income-provider must be repaid at a later stage, usually when you die.
Thus equity release is particularly useful for elderly
persons who do not intend or are not able to leave a large estate for their heirs when they die. The reverse mortgage
is a form of equity release available in the United States, for those aged 62 or more.
The other type of plan is a reversion plan - where the homeowners sells all or part of the property to the equity release provider in return for a right to remain there rent free.
The UK
equity release market
is now fully regulated. Both lifetime mortgages and home reversion plans now fall under the remit of the Financial Services Authority
(FSA). Prior to FSA regulation, many lenders signed up to SHIP, a voluntary code of conduct that provides a number of guarantees.
SHIP ('Safe Home Income Plans') was formed in 1991 in an attempt to improve the equity release market and its previous poor reputation. The SHIP guarantees include a guaranteed right to remain living in the property which is the subject of the equity release, either for life or until entry into long term care. In addition there is a vital No Negative Equity Guarantee - which essentially guarantees that the amount to repay the equity release plan on death or entry into long term care can never exceed the value of the property itself, and so no debt can ever be left behind for beneficiaries of the equity release borrower.
The current members of SHIP include Aviva, Hodge Equity Release, Bridgewater, Stonehaven, New Life, Just Retirement, LV=, More 2 Life and Godiva.
Whilst a number of equity release providers, most notably Prudential, exited the market in the wake of the Credit Crunch, this trend has been reversed since the end of 2010, with a number of these companies - including More 2 Life, New Life and Stonehaven - keen to attract new customers once again.
In 2010, around £800 million of equity was released by UK over 17,500 home owners using regulated equity release.
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
value, while also obtaining a lump sum or a steady stream of income
Income
Income is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings...
, using the value of the house.
The "catch" is that the income-provider must be repaid at a later stage, usually when you die.
Thus equity release is particularly useful for elderly
Old age
Old age consists of ages nearing or surpassing the average life span of human beings, and thus the end of the human life cycle...
persons who do not intend or are not able to leave a large estate for their heirs when they die. The reverse mortgage
Reverse mortgage
A remortgage is a form of equity release available in the United States. It is a loan available to seniors aged 62 or older, under a Federal program administered by HUD. It enables eligible homeowners to access a portion of their equity...
is a form of equity release available in the United States, for those aged 62 or more.
Types of arrangement
- Lifetime mortgage: A loanLoanA loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
secured on the borrower's home (a mortgage loanMortgage loanA mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
) is made. Compounded interest is added to the capital throughout the term of the loan, which is then repaid by selling the property when the borrower (or borrowing couple) dies or moves out (perhaps into a care home). The borrower retains legal title to the home whilst living in it, and also retains the responsibilities and costs of ownership.
- Interest only: A mortgageMortgage loanA mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
is made, on which the capital is repaid on death. InterestInterestInterest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
payments are paid whilst the borrowers remain in the propertyPropertyProperty is any physical or intangible entity that is owned by a person or jointly by a group of people or a legal entity like a corporation...
.
- Home reversion: The borrowers sell all or part of their home to a third party, normally a reversion company or individual. This means all or part of their home belongs to somebody else. In return, the borrowers receive a regular income or cashCashIn common language cash refers to money in the physical form of currency, such as banknotes and coins.In bookkeeping and finance, cash refers to current assets comprising currency or currency equivalents that can be accessed immediately or near-immediately...
lump sum (or both) and they continue to live in their home for as long as they wish.
- Shared appreciation mortgageShared appreciation mortgageA shared appreciation mortgage or SAM is a mortgage in which the lender agrees as part of the loan to accept some or all payment in the form of a share of the increase in value of the property.- In the UK :...
: The lender loans the borrower a capital sum in return for a share of the future increase in the growth of the property value. The borrowers retain the right to live in the property until death. The older the client the smaller the share required by the lender.
- Home income plan: A lifetime mortgage where the capital is used to provide an income by purchasing an annuity often provided by the lender, which is often an insuranceInsuranceIn law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
company.
Features of an equity release plan
- Receive a cash lump sum or drawdown the cash in stages.
- You are free to spend the money you release as and how you wish.
- Typically no monthly repayments to make.
- Stay in your home for as long as you wish.
- SHIP-approved plans offer a no-negative equity guarantee, meaning you will never owe more than the value of your home. SHIP-approved plans also guarantee that you can stay in your home for life and move to another property if you wish (subject to provider criteria).
- All equity release schemes will reduce the value of your estate.
- Your entitlement to state benefits may be affected.
United Kingdom
The UK equity release market is basically made up of two types of equity release plan.. There are several providers within each category, each offering different terms and conditions. For this reason, it is prudent for home owners to take independent financial advice The most popular plan is a lifetime mortgage - where the homeowner retains ownership of the property but the property is charged with the repayment of a loan or mortgage, which accrues rolled up interest over the period of the homeowner's lifetime. To help customers decide whether equity release is right for them, a number of companies provide a free equity release calculator to show a rough estimate of the amount of equity that could be released.The other type of plan is a reversion plan - where the homeowners sells all or part of the property to the equity release provider in return for a right to remain there rent free.
The UK
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
equity release market
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
is now fully regulated. Both lifetime mortgages and home reversion plans now fall under the remit of the Financial Services Authority
Financial Services Authority
The Financial Services Authority is a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom. Its board is appointed by the Treasury and the organisation is structured as a company limited by guarantee and owned by the UK government. Its main...
(FSA). Prior to FSA regulation, many lenders signed up to SHIP, a voluntary code of conduct that provides a number of guarantees.
SHIP ('Safe Home Income Plans') was formed in 1991 in an attempt to improve the equity release market and its previous poor reputation. The SHIP guarantees include a guaranteed right to remain living in the property which is the subject of the equity release, either for life or until entry into long term care. In addition there is a vital No Negative Equity Guarantee - which essentially guarantees that the amount to repay the equity release plan on death or entry into long term care can never exceed the value of the property itself, and so no debt can ever be left behind for beneficiaries of the equity release borrower.
The current members of SHIP include Aviva, Hodge Equity Release, Bridgewater, Stonehaven, New Life, Just Retirement, LV=, More 2 Life and Godiva.
Whilst a number of equity release providers, most notably Prudential, exited the market in the wake of the Credit Crunch, this trend has been reversed since the end of 2010, with a number of these companies - including More 2 Life, New Life and Stonehaven - keen to attract new customers once again.
In 2010, around £800 million of equity was released by UK over 17,500 home owners using regulated equity release.
See also
- Mortgage loanMortgage loanA mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
- Equity loanEquity loanAn equity loan is a mortgage loan in which the borrower receives cash. Typically the loan is secured by real estate already owned outright.For example, if a person owns a home worth $100,000, but does not currently have a mortgage on it, they may take an equity loan at 80% loan to value or $80,000...
- Mortgage law
- UK mortgage terminologyUK mortgage terminology-Introduction:The UK mortgage market is one of the most innovative and competitive in the world. Most borrowing is funded by either mutual organisations or proprietary lenders...
- Reverse mortgageReverse mortgageA remortgage is a form of equity release available in the United States. It is a loan available to seniors aged 62 or older, under a Federal program administered by HUD. It enables eligible homeowners to access a portion of their equity...
, the American equivalent - PIV the Italian equivalent