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Types of Equity Release Schemes

There are many different types of equity release schemes. There isn't a 'one scheme fits all'. Therefore, you'll need to know what you want from your scheme. We explain the different types of schemes and the pros and cons of each below.

Gaining necessary funds to live out a comfortable retirement is possible for over 55s. Lifetime mortgage is one product that makes it a little easier for you to access funds currently tied up in property assets like your main residence. There are a few different types of lifetime mortgages available to you. You can choose the type of mortgage that best fits your situation. To understand the characteristics of these loans, it is important to know a few facts including the fact that they are not like traditional mortgages with a monthly repayment.

Lifetime mortgages are setup for repayment after death or a permanent relocation to a care facility. Usually the homeowner's beneficiaries or homeowner will sell the home as a way to get the funds necessary to repay the loan and compounded interest. The home is sold at current market value, so any leftover funds not required for interest and capital repayment are left to the beneficiary. There are two main types of lifetime mortgage to introduce in this article: lump sum and drawdown. All other lifetime mortgage products fit into one or the other of the two categories.

Lump Sum Lifetime Mortgage
Under this lifetime mortgage, a homeowner receives a lump sum of tax free funds. The sum is determined by age and property valuation. Age determines the life expectancy of an individual. Obviously a person who is 55 years of age should have longer to live than someone who is 85. The reason age applies is to determine the length of time interest will accrue. The longer interest has to accrue the larger the eventual repayment will be.

• In easier terms a lifetime mortgage capital sum usually doubles in 10 to 12 years.

The other factor is property valuation. The provider will determine there is enough value in the home to remove equity. The more value a home has the more funds can be released. Some lifetime mortgage companies have a maximum loan amount, while others do not.

Since the loan is set up for the maximum loan to value meaning you receive as much as possible in a capital sum there is usually no chance to remove more funds at a later date. The homeowner receives as much as possible right up front in one payment. This is helpful if that much is needed right away.

Lump sum lifetime mortgages can have variations such as interest only and ill health. Both are discussed on separate pages for the differences they offer as a lump sum lifetime mortgage.

Drawdown Lifetime Mortgage
A drawdown lifetime mortgage is slightly different than the standard lump sum. You still receive an initial lump sum, but there is also a cash reserve facility set up where you can remove additional funds at a later date. The initial lump sum is smaller than the maximum funds available. It can be between £10,000 and £15,000 with most providers. This sum is still tax free and will have compounding interest accruing.

The funds in the cash reserve can be accessed when the homeowner requires more funds. These funds can be withdrawn in £1,000 or £2,000 increments most often. It is the smallest amount the provider allows. The maximum amount is what the homeowner has in the cash reserve facility.

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