Equity release schemes allow you to release cash from your home in order to provide a capital sum. Equity release schemes are designed to be a lifelong commitment so if you change your mind, need to move house or want your equity for something else later then you could find yourself seriously restricted. Which magazine describes them as an expensive lifetime commitment.

Money Box report that in the first three months of this year £633,000,000 was loaned under equity release schemes. That is a 52% increase on the same period last year.

There are two main types of equity release schemes. One is a lifetime mortgage and the other is a home reversion scheme. The remainder of this article relates to lifetime mortgages. With a lifetime mortgage you borrow a proportion of your home’s value. Interest is charged on the amount but nothing usually has to be paid back until you die or sell your home. The interest is compounded or “rolled up” over the period of the loan meaning that you are being charged interest on the interest. With a conventional mortgage interest is charged on an amount that decreases with time. With lifetime mortgages then interest is being charged on an increasing sum. Money Box report that if you borrow 20% of the value of your home now and property prices increase by 1% per annum then in 20 years time you will owe 44% of the value of your home.

There are different types of lifetime mortgage. Make sure you get the right one for your circumstances.

Lifetime mortgages provided by a member of the Equity Release Council have a “no negative equity” guarantee meaning that you will never owe more than your home is worth. Such mortgages are also portable and can be moved to another property if you wish to move provided that property satisfies the lending criteria.

Speak to an independent financial adviser before deciding whether to take out an equity release scheme and get independent legal advice. Explore all other options and find out how equity release would affect your entitlement to state benefits. Borrow the minimum amount you need to or choose a drawdown scheme to give you the option to borrow money as and when you need it. Consider taking out a scheme that lets you make interest payments each month if you can afford to. Choose a scheme with no early repayment charges or ones that apply only for a limited period.

You should start by considering all alternatives before proceeding with an equity release scheme. Is there a real need for the money? Could it be released in any other way? For example could you sell your home and move into a smaller less expensive property? If you would like any advices about equity release then contact helen@dixonstewart.com or call 01425 279222