The first equity release plan was started in 1965, but it is not like the plans of today. The basic premise was the same – to offer cash to property/asset rich households that were in need of physical spending funds. In 1972 the first home income plan was created based on fixed rate mortgage and annuity mortgages, which brought UK residents ever closer to the concept of today. Between the 70s and 90s the retirement equity release concept was created. However, there were problems with the concept and how it would ultimately benefit elderly homeowners. With many troubles, it was decided in 1991 to start SHIP. SHIP or Safe Home Income Plans are designed to guard against financial difficulties for homeowners. Plans such as ‘A Full House’ by Norwich were released as the first official tax free lump sum mortgages, including drawdown mortgages. By 2003 many market changes occurred until in 2004 the government called for more regulation.
In 2004 the Financial Services Authority (FSA), now the Financial Conduct Authority (FCA) demanded more regulations be put in place to create safe home equity releases for elderly home owners. For a while the market was met with some definite resistance and apprehension. People could not believe that the new products would be any better than the near scams of the previous decades.
Now it is nearly 11 years later, there are certainly some individuals who have trouble believing in the equity release concept, but despite those who are apprehensive, there are plenty of advantages and overseers in place to ensure all equity release products are worthy and safe.
The Regulatory Authorities
Starting with the FSA and continuing with the FCA is the concept of Safe Home Income Plans. These plans must meet strict guidelines to be called equity release products. If the requirements are not met the bank or other lender can be in serious trouble for attempting to lend under equity releases for retirees. In addition to the FCA regulations, there is the Equity Release Council’s Code of Conduct. Both regulatory agencies demand a ‘no negative equity’ clause be a part of any equity release document signed. It states that the homeowner cannot lose other assets other than the home in repayment of the interest and principle sum of the mortgage. In other words, at the time of death or when the homeowner needs long term care, the home is sold to repay the capital sum first and any outstanding interest. Should the current market value not account for all the interest, the company with the loan still has to clear the debt as being paid in full – the company cannot ask the beneficiary to sell other assets or take any life insurance to repay the debt.
Types of Home Equity Release
There are two types of home equity releases that are popular today because of the change in regulations. The first is home reversion. Home reversion is a sale of the property in return for a lifetime tenancy agreement. All of the home or only a portion of the home can be sold to access funds for the homeowner to live on. This type of plan does not require any return of funds because the home has already been sold to account for the funds provided to the homeowner. At the end of life the home is sold in full to the home reversion provider. The left over funds are provided to the beneficiary. The return on investment for the home reversion provider is the difference between current market value and the funds given to the homeowner/beneficiary.
The second option is a lifetime mortgage. There are different products like a drawdown lifetime mortgage, enhanced equity release, and interest only lifetime mortgage that are a part of the lifetime mortgage offerings. The key difference with these products is a repayment is required. This is where the home has to be sold to repay interest and capital sums, but the no negative equity clause protects against any other assets being seized.
In this instance, the home owner retains full ownership until death. For some homeowners this is a more comfortable option than selling a part of their property for only a portion of its value.
The fact is both types of home equity release have benefits and some disadvantages. They are both highly popular, with lifetime mortgages being easier to find on the current market. The popularity of both products is the highest it has ever been as the industry works to clear any misconceptions about prior equity release schemes, as well as to offer more transparency over current regulations.
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