When it comes to debt, there are many aspects to consider before deciding on the right debt solution for you.
For those with a mortgage, a term that is often used with regards to your debts is “equity release”.
Equity is the difference between the value of the home and the total of the mortgage, and any loans secured on it. Equity release refers to cashing in on the equity from the home without having to leave it.
The money is released either in a lump sum or a steady stream of income using the value of your home.
Those releasing equity from their homes usually need to be homeowners over the age of 55. The value of the property will also affect a person’s eligibility and the amount the lender is willing to offer.
Equity release can be helpful for those looking to increase their income, pay off existing unsecured debts, or pay for care needs later in life.
If you think that you may be eligible for an equity release and that releasing equity from your property may be the best way to deal with your debts, it’s highly recommended that your next step is to seek advice. Our experienced debt advisers can discuss all of the options available to you so that you can make an informed decision on your next steps.
Types of Equity Release
There are two main types of equity release schemes. Each one works differently and deciding on the suitable option will depend on your circumstances and goals.
A lifetime mortgage gives a person funds in either a lump sum or in smaller amounts over time.
The maximum amount of money that can be borrowed will be agreed with the scheme provider.
Those who take out a lifetime mortgage will remain the owners of the property.
Lifetime Mortgages do carry interest which can either be paid or allowed to build up over time.
The loan along with any interest will be paid back wither when that person passes away or moves into long-term care.
Home reversion is the less common form of equity release. Under this scheme, a person will sell all or part of their property to a home revision company who will then provide a lump sum of money or regular monthly payments.
A person can continue to live in the property until they pass away or sell their remaining share.
Once the property is sold, the home reversion provider will be paid the agreed share of the final sale price.
Risks of Equity Release
Equity release is not suitable as short-term loan. It’s a long-term commitment which needs to be carefully considered before proceeding. Equity release plans are generally designed to be paid back only when you die or move permanently into care – if your partner isn’t on the equity release and they outlive you, they could be forced to move house.
There are a few risk factors to consider before deciding on releasing equity from your property. Releasing equity will reduce the overall value of the property and may affect your entitlement to state benefits.
If you opt for a home reversion plan with your equity release, the company providing the plan will acquire the deeds to the property. If your home increases in value from here, you will only benefit from the increase in the proportion of the property you still hold. Similarly, any decreases in value will be shared by both you and the loan equity provider. Once you’ve taken out the equity release, if you decide to downsize to a smaller property, you may be required to repay the equity, either in part or in full.
The final consideration is what happens when you pass away. The property you released equity from will be sold by the equity provider, and the equity (plus any interest) will be paid off. Any extra money from the sale will go to inheritance as normal. For those looking to leave the property as a place of residence for loved ones, equity release may not be the best option.
For advice on equity release as well as all formal Scottish debt solutions, contact Trust Deed Scotland®. Our experienced debt advisers will be able to provide tailored advice based on your individual circumstances and allow you to make an informed decision on the right decision for you.