Home Equity Loans

It is ironic that some of the UK's poorest people are actually rich in terms of property equity. In fact, homeowners in this country with no mortgage left to pay on their properties represent a combined equity of £400 billion. Because many people do not want to move from their house in order to access some of the equity they have built up in it, they borrow money on the house whilst continuing to live there. This type of loan is known as a home equity loan.

How do home equity loans work?

Home equity loans, sometimes also referred to as home equity release schemes, work by giving you a loan based on the value of the property. Schemes will differ from lender to lender, but the loans generally work by giving you either a cash lump sum or a regular income in exchange for your property, or part of its value, when you move house or die.

There are three principal types of home equity loans available on the market: the cash release scheme, the home income plan and the home reversion scheme.

Home reversion scheme

This is when the homeowner sells his home, or a percentage of it, to a plan provider. In exchange, the homeowner receives an agreed amount of money - either a cash lump sum or a regular income, or both, but can continue to reside in the property for as long as he so wishes. When he dies or is taken into care, the plan provider will recoup the money owed. Any remaining equity is distributed according to the borrower's will.

Pros: Provides an income if you have no other means of repaying a loan.

Cons: You are unlikely to be offered the full market value of your home.

Cash release scheme

With this type of scheme, the homeowner would take out a fixed rate interest-only mortgage on his home, effectively buying himself a regular income with the money borrowed.

Pros: You are not selling your property in exchange for the income you receive.

Cons: Your next of kin will have to repay the mortgage on your behalf should you fail to repay it in full while you are alive.

Home income plan

Here, a monthly income is generated through a loan, usually invested in an annuity which also covers interest on the loan. These plans tend to only be available to homeowners over the age of seventy-five.

Pros: Income can be guaranteed by opting for a fixed interest rate loan.

Cons: Funds paid into the annuity will belong to the plan provider when you die, unless you purchase capital protection when taking out the loan.

© AskFinancially.com 2008

Home Equity Loans

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