The simplest explanation for an equity release scheme is a loan on your property. This "loan" is taken in lieu of the equity that you have on your house. The equity of a property is the amount actually owned by the owner, and not the financial institution financing it, or where the owner holds a mortgage. For simplicity’s sake, you can say it is the difference in the values of your house in today’s market, and the amount the home owner owes the bank.

Many older home owners decide to release a part of their built up equity via equity release schemes, in lieu of a cash payment. Senior citizens opt for equity release schemes as a means to sustain themselves financially till the time of their death.

Depending on the reason provided at the time of application for an equity release scheme the borrower can either obtain a lump sum, or have the ability to receive a steady cash flow every month for a fixed number of months.

Benefits

The benefits of equity release schemes are plentiful

• It provides tax free income in the form of monthly installments, or a lump sum to the home owner.

• It can drastically reduce the amount of inheritance tax.

• Home owners are protected by the No Negative Equity Guarantee, which ensures their stake in the house never turns negative.

Mortgage

A mortgage is a loan of sorts secured against the borrower’s home. The bank or financial institution owns a part of your house, and the home owner owns the rest of the equity.

Provisions

There are five options you have at the time of signing up for an equity release scheme.

Lifetime mortgage

A lifetime mortgage is a mortgage that was taken by the home owner to generate income. The home owner receives monthly payments until the time of their death, or vacation of premises upon which the financial institution sells the house to redeem their investment which was paid to the home owner over the past few years. While residing in the home, the home owner retains the title to the home, and is responsible to bear all the costs of maintenance and ownership.

Interest only mortgage

A mortgage is taken out on the home, for which the home owner makes regular monthly payments to the financial institution. The home owner receives a lump sum or a regular flow of cash; or both. The amount owed to the financial institution needs to be paid upon death of the home owner.

Home reversion

A part of the home, or at times the whole property is sold to a third person, or a financial institution. The said home owner can continue to live in the home, and will continue to receive a regular flow of income or a lump sum; or both.

Shared Appreciation mortgage

The financial institution lends the home owner a sum in lieu for the future increase in the property’s worth. The homeowner can continue to live in the property until death.

Home income plan

A mortgage is taken out and the sum derived is retained by the financial institution, and paid in installments to the home owner.