Equity Release

With new financial instruments coming in to the market everyday, it is no longer so tough to plan for retirement. In fact one of the best ways to plan retirement these days is reverse mortgage, a term that is commonly used interchangeably with Equity Release.

The term Equity Release is generally associated with a capital object like a house or land, which can provide a steady income stream even while the owner uses the value associated with the capital good. The principle on which the scheme works is that the rate at which the value of the capital appreciates is lesser than the interest rate of the mortgage. Equity Release is the best way to finance the expenses of old age if the client does not intend to leave large estates for their heirs on their death.

There are quite a few types of arrangements for Equity Releases. The lifetime Mortgage scheme pays interest earned on the loan against the capital while the borrower uses it. This loan is repaid on selling the property when the borrower expires or stops using the property. However, till he uses the property, the borrower retains the legal rights and maintenance costs of the capital. In an interest only scheme, the capital gets repaid back only after the death of the borrower while the interest payment is made while the borrower remains propertied, from his income.

These are just a couple of examples of over a forty Equity Release plans that have been devised in the British equity market till date. Before choosing a particular plan, it should definitely be checked whether it suits your needs the best. This should be taken in to account because Equity Releases could be held both as pros and as cons.

Equity Releases ensure an index-linked steady stream of income throughout a person’s lifetime. Besides, it can considerably reduce inheritance tax of the heirs of the capital owner. The No Negative Equity Guarantee ensures that the borrower is insured against any downturn in the housing market. Finally, the Equity Releases ensure that the borrower can refinance the mortgage with other providers if in case the interest rates are to fall.

However, on the other hand, Equity Releases decrease the amount of inheritance to the heirs on their parents’ decease. They could also mean that the amount a person would like to donate to charity would be substantially cut down. UK equity market is a little dicey as even tested benefits may be affected.

The market for Equity Release in UK has been regulated systematically since 2005. These days all the Equity mortgage schemes are under the purview of Financial Service Authority (FSA). Before this, quite a number of lenders used to register with SHIP, which provided for a no negative equity guarantee.

HSBC and RBS are recent players who have entered the market for Equity Releases in the later part of 2006. Initial players like Northern Rock, Mortgage Express and Norwich Union that have been there even before the regulation was brought in, are still big players in the market.