Equity release

Equity release is a means of retaining use of your house or other object which has capital value, while also obtaining a steady stream of income, using the value of the house.

The "catch" is that you have to re-pay the income-provider at a later stage, usually when you die.Thus equity release is particularly useful for senior citizens who do not wish to leave a large estate for their heirs when they die.(See Reverse mortgage for an American equivalent, generally available only to those aged 62 or more.)

Types of arrangement

Lifetime mortgage - A loan secured on the borrower's home (a mortgage) is made to generate an income. Interest payments are added to the capital throughout the term of the loan, which is then repaid by selling the property when the borrower(s) die or move 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 mortgage is made, on which the capital is repaid on death. Interest payments are paid out of the borrowers' income whilst they remain in the property.

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 cash lump sum (or both) and they continue to live in their home for as long as they wish.

Shared appreciation mortgage - The lender loans the borrower a capital sum in return for a share of the future increase in the growth of the property. 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 insurance company.

Advantages of equity release

* It can provide a lump-sum of tax-free cash or a steady income (annuity), which can be index-linked, for the rest of your life.
* It can reduce the amount of inheritance tax paid by your estate.
* The No Negative Equity Guarantee (NNEG) protects the borrower in the event of a downturn in the housing market.
* If interest rates fall, borrowers are free to refinance their mortgages at a lower cost with other providers.

Disadvantages of equity release

* It may decrease the amount of money your family will inherit upon your death - assuming the value of the property grows at a slower pace than the interest rate on the mortgage.
* It may reduce the amount that you can bequeath to charity.
* In the UK, it may impact any means tested benefits that the borrower may be entitled to.

The UK equity release market

The UK equity release market was partially regulated in 2005. All mortgages, including lifetime and interest only arrangements 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 amongst other things a "no negative equity guarantee".

The major players were Norwich Union (40%), Northern Rock (28%) and Mortgage Express (17%) in 2004. High street banks HSBC and RBS both entered the equity release business in the first quarter of 2006; however, neither are SHIP members.

Throughout 2007 and 2008, product innovation from specialist lenders as well as the larger high-street players such as Prudential and Norwich Union has led to equity release plans being more versatile than in the past, with a number of developments helping to mitigate what may have been key barriers for consumers previously. Coventry Building Society entered the equity release market in 2007 through its specialist lending arm, Godiva Mortgages, introducing a lifetime mortgage with no early repayment charges, thereby allowing clients the option to make ad-hoc repayments, which can mitigate the roll-up of interest.

During 2008, due to the effects of the credit crunch, those lenders who have not traditionally relied on the money markets to fund their propositions have found it more difficult to produce equity release plans that can compete with those of the larger players, many of whom fund their lending from within their own organisations. As a result, the market in 2008 has been led by Prudential and, more recently, Norwich Union, both of whom offer preferentail plans via a series of specialist independent intermediaries.

Also in 2008, three of the UK's leading independent equtiy release specialists came together in an alliance known as SAFER (Specialist Advisers for Equity Release), campaigning to improve the standard of advice that consumers receive when considering equity release.

The UK's ageing population, combined with short-term inflation and the closing off of many other routes to credit, seems likely to mean that modern, regulated equity release plans will grow in popularity over the short term.

The US equity release market

See also

*Mortgages
*UK mortgage terminology
*Reverse mortgage, the American equivalent

External links

* [http://www.ship-ltd.org/ SHIP] - UK industry consumer protection body
* [http://www.specialistequityrelease.org/ Specalist Advisers For Equity Release (SAFER)] - Trade body for specialist equity release intermediaries
* [http://www.actuaries.org.uk/files/pdf/equity_release/equityreleaserepjan05V1.pdf] - A review by the Actuarial Profession
* [http://www.agepartnership.co.uk/ Equity Calculator] - Demonstrates the effect of a lifetime mortgage on the value of your estate over time
* [http://www.retirement-plus.co.uk/history_of_er.html The History of Equity Release in the UK]