Finance - Equity Release Schemes

Equity Release Schemes

The equity release scheme is an interesting concept that allows homeowners to release some of the capital tied up in a property that may have greatly appreciated in value. The released capital is then invested in a product that generates an extra income and at the same time, allows the homeowner to remain in the same property.

The way this works is that some specialist companies take a stake in the property and become the joint owner, while others arrange a loan on a mortgage type basis. On death or when the house is eventually sold, part of the proceeds go back to the specialist company or lending institution.

Though this is, in principle, an interesting product, its early history has attracted some misunderstandings. When the company purchases a portion of the property, normally set at 50 percent, it is entitled to 50 percent of the selling price, even though the property value may have trebled. In the case of a mortgage type basis, the income on the investment product that provides the extra income must pay the interest on the mortgage. This erodes any income potential and if the product has an equity base, then this may have even more adverse erosion on the capital and income potential.