What is a home equity release loan?
A home equity release loan is one which uses the equity you have in your house (i.e how much of it you own) as security. In general, no repayments are made until you sell the house or die.
Loans of this type are generally entered into by older people who have a very small income, but have mortgage-free homes (this is sometimes referred to as being ‘asset-rich, cash-poor’). They might use the money to maintain or upgrade their home, repay debt, or to supplement their pension.
A home equity release loan may be right for your situation, but it needs very careful consideration - you won’t be able to leave your house to your offspring, and your debt will grow quickly with the accumulated interest because generally no repayments are being made. It’s easier to keep a home equity release loan under control if you are only borrowing a small amount compared to the value of your house.
There are no specific legal requirements for how a home equity release (HER) plan must be made, apart from the laws applicable to financial or property transactions in general (e.g. the Consumer Guarantees Act, and the Credit Contracts and Consumer Finance Act). Look for a plan which will allow you to retain the right to live in the house for the rest of your life, and where you don’t end up owing more than the equity in your house.
If you’re interested in getting a home equity release loan, it’s well worth shopping around. There are a number of providers and their products are not all the same. Signing on for a home equity release plan is a very big decision, so we recommend you seek financial and legal advice before proceeding.
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What are the different sorts of home equity release loan?
The five main types of home equity release loan are:
1. Reverse mortgage
With this option you can choose to have the loan paid to you as
- a lump sum (e.g. to have additions built onto your home)
- instalments that can be used as additional regular income
- a line of credit so that you can draw on funds as you need them, which might be useful if you need to increase your income temporarily
You can combine the options above to suit your needs. Interest will be charged on top of your loan, and will be charged until the loan is paid back, you leave the property, or you die.
2. Home reversion
You sell all or part of your house to either the provider or a third party. You can continue to live there but may have to pay market rent. This is a home buyback scheme.
3. Term Loans
Term loans work on the same basis as a reverse mortgage, except the loan is repaid after an agreed amount of time. Often the house has to be sold at the end of a term loan, and this is the option many people choose if they don’t wish to stay in their home.
4. Rates postponement
This is an agreement with the local council that lets you postpone payment of your rates until your house is sold. The arrangement is different depending on each council, but interest will be charged on the postponed rates, and you may not be able to combine a rates postponement plan with another form of equity release.
5. Reverse annuity mortgage
This gives you a monthly allowance that is paid from home equity. It is usually paid back from the sale of the house when the home owner dies (an annuity is a form of insurance, where you give the insurance provider a fixed lump sum payment and in return you are given a regular allowance for a set number of years, or until you die).
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What is a home buyback scheme?
In a home buyback scheme, your house is sold to a person or organisation for an agreed period of time and you are given a price at which you can repurchase the house, which usually includes a substantial fee. These agreements are sometimes entered into if the owner of a house needs a lot of money quickly. In the past home buyback schemes have been extremely risky, with scheme operators sometimes taking out a mortgage on the property or selling it to someone else for a profit.
Home buyback contracts signed after 2003 are covered by the Credit Contracts and Consumer Finance Act. This means that:
- if you sign up to one, the operator (the people with whom you have signed the contract) must give you a copy of all the terms and conditions
- you can lodge a ‘caveat’ to tell other people that you have an interest in your home, which can make it harder for the operator to sell your home
- the operator must ensure that you get independent legal advice; the lawyer must explain the terms to you, witness your signature on the documents, and certify that this has been done – otherwise the operator can’t sell or mortgage your home without permission from the High Court
- the Court can cancel or reduce unreasonable fees charged by the operator, or re-open an oppressive contract and terminate or waive any terms in the contract.
You’ll find more information about home buyback schemes on the Consumer Protection (Ministry of Business, Innovation and Employment) website.
Signing up to a home buyback contract is a very big decision, so we recommend you seek financial and legal advice before proceeding.
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If I want to free up some of the money tied up in my home - are there alternatives to a home equity release loan or a home buyback scheme?
Assuming that a personal loan or purchasing on credit aren’t suitable options, you could consider:
- downsizing from a large or expensive house to a smaller or less expensive one, and living off the surplus funds after selling the large house
- subdividing the land and selling some of that
- arranging for your children or other family members to buy a portion of the house jointly, with you retaining the right to live in the house for the rest of your life
- Taking in boarders or renters