Wikipedia - 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.)

[edit] 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.

[edit] 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.

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[edit] 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.

[edit] The UK equity release market

The UK equity release market is basically made up of two types of equity release plan. 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.

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 Julian Hodge Bank, Norwich Union, Prudential, Bridgewater, New Life, Just Retirement, Liverpool Victoria, National Countie and Godiva, amongst others.

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. This has included a move towards more drawdown products (where the customer borrows a specified amount initially but with an agreed reserve fund available for future use, with the drawdown only attracting interest once used). 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. Although, any good adviser will already be adhering to the points in the code of conduct,and more importantly has to be regulated by the FSA.

As part of any SHIP scheme it is necessary for the equity release customer to use an independent solicitor to verify that the customer understands the scheme and is not acting under any duress. In 2008, a group of specialist solicitors called the Equity Release Solicitors Alliance was formed. This group, made up of seven firms who have chosen to specialise in equity release and are able to provide national coverage in England and Wales, went on to launch formally at the Law Society in London in early 2009. The launch included a 12 point charter. The firms involved in ERSA are Equilaw, Lees Lloyd Whitley, Ashfords, Blacks, Gwyn James, Goldsmith Williams and Birchall Blackburn.

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.

[edit] The US equity release market

[edit] See also

• Mortgages
• UK mortgage terminology
• Reverse mortgage, the American equivalent
• [PIV] the italian equivalent

[edit] External links

• SHIP - UK industry consumer protection body
• Specalist Advisers For Equity Release (SAFER) - Trade body for specialist equity release intermediaries
• [1] - A review by the Actuarial Profession
• Equity Release Calculator - Demonstrates the effect of a lifetime mortgage on the value of your estate over time
• The History of Equity Release in the UK
• Equity Release information resource
• Eligibility calculator - Identifies those who are eligible for equity release.
• ERSA - Website of the Equity Release Solicitors Alliance

This article is licensed under the GNU Free Documentation License. It uses material from the Wikipedia article "Equity release".