How to Improve Post Retirement Finances by Using Equity Release Schemes
If you are 55 or older, of retirement age, and you are considering options to increase your finances then equity release is an interesting option to consider. You might be asking yourself, though, how does equity release work? Well, here is a basic idea of how it works.
Equity release schemes are plans that allow you to raise money from your current home by releasing some or all of the equity. In an equity release scheme you would essentially take out a loan against the value of your home.
You and your partner or spouse would retain the right to live at the property and the payment of the loan would come from the sale of the home upon the death of you and your partner, or when you both move out.
This is how equity release works, but why would you choose to do it? If for example your retirement funds simply have not stretched as far as you intended, then an equity release plan can give you the funds you need.
Or, perhaps you want to take that dream holiday you have been putting off for too long. The money is yours to do with as you please.
The way you use your money is definitely up to you. However, you should understand the pros and cons of equity release schemes before you apply for one or worse sign on the line.
Getting to the Details
You have two options in equity release schemes: Lifetime mortgages and home reversion.
Lifetime mortgages are loans. They must be paid back. They also accrue interest. There is only one product under this heading that will not accrue interest- the interest only lifetime mortgage. This mortgage allows you to pay your interest payments each month while you are alive. This leaves only the principle balance to be repaid upon your death.
The downside to this option is that you need the funds to pay the interest. Many seeking an equity release do not have the funds to cover the payments. They are looking for a way to fund their retirement without extra costs in the now.
Mortgages under the lifetime category can certainly provide you with funds to live on. You do not need to take out the entire equity in your home and in most cases you will only receive a certain percentage such as 22% to 44% because the provider is going to calculate life expectancy versus home valuation. The provider does not want to end up in a negative equity situation because there is a clause stipulating your beneficiaries do not have to pay any amount above the value your home gets in the sale.
It is difficult in this scheme to leave behind money for your beneficiaries. You also need to be at least 55 years of age; however, if you have working years ahead of you it can be important to use them. The later you take out the loan the less interest to accrue.
Reversion schemes are different in that you sell a part of your home. You actually turn a part of your home over to the financial provider. They keep this portion until your death or move. When you decide to move to a new home or into a care facility the rest of the home is sold to the provider. They give you a fair percentage based on the costs of what they could have earned selling the home right away.
They will then sell the home on the market for its actual value. The difference in what you received and the current value is what the provider makes in revenue.
Should you die while living in the home, the rest of the home is sold and the amount of money you would have taken for that sale is given to your beneficiaries. This is a near guarantee of money left behind for family. It just depends on the amount of home sold and the current value of your property.
Under this scheme you need to be 65 years of age. You also get to live in the house rent free for your life under the lifetime tenancy agreement. You do not owe money in the end.
There are all kinds of variations that will fit into what your requirements are, so why not consider equity release plans for your retirement? Once you know how does equity release work in full detail you will be able to make an educated decision for how best to approach more finance for your retirement.