Reputation overhaul for equity release schemes

Mortgage lenders are calling upon the Government to do more to promote equity release schemes among UK homeowners. A new report from the lender trade body, the Council of Mortgage Lenders (CML), entitled; "Please release me! A review of the equity release market in the UK, its potential and consumer expectations", tackles the issues of why equity release is more popular overseas than it is in the UK.

The report says that while fundamentals such as growth in housing wealth, an ageing population and potential pension shortfalls mean there is huge potential for the UK equity release market, the sector has so far seen only steady growth. Yet Australia, New Zealand and the USA have the same underlying fundamentals but the equity release market has developed more strongly in these countries than the UK.

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Types of plans available

Essentially, equity release plans allow homeowners to release tax-free cash from their homes to boost their finances in retirement. The two main types of equity release plans available are lifetime mortgages and home reversion plans. Both types of plan allow you to stay in your home. Lifetime mortgages offer either an immediate lump sum or a series of payments, which are set against the borrower's home. When the borrower dies or goes into long-term care, the home is sold and the lender takes the value of the sum lent, plus the interest it has accrued.

Home reversion plans involve selling part, or all, of your home to an investment company (called a reversion company) which, in return, will give you a cash lump sum or an income for life and sometimes the option of both. When you die, if you have sold 100% of your home to the reversion company, the property will be sold and all of the proceeds will go to them. Otherwise, the value of any portion of your home that you have not sold will pass to your estate.

Eligibility

To be eligible for most schemes you should be aged 5 and 70, own a property that is worth at least £30-£40,000 and, ideally, be a freeholder. Money released from the value of your principle residence is free of tax, although if the cash is then invested there may be tax to pay on any income or growth.

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04 April 2008 © Moneyextra.com

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