HERMS | Home Equity Release Mortgage Schemes explained

Below, we delve deeper into Home Equity Release Mortgage Schemes (HERMS) and take a detailed look at how they work, and their possible benefits and potential drawbacks. We also investigate how HERMS can be used and look at how Shire Direct can help!

Table of Contents:

The Home Equity Release Mortgage Scheme explained...

Home Equity Release Mortgage Schemes (or the much less of a mouthful abbreviation 'HERMS'!) is a Lifetime Mortgage, a type of Equity Release Scheme available to those borrowers who have reached a particular minimum age. Most HERMS providers have now lowered their minimum age requirement to 55 - i.e. the youngest party to ownership should be 55 years of age or older.

To put it simply, the Home Equity Release Mortgage Scheme allows the homeowner of 55 years old and above to release a proportion of the equity in their home as a loan which is secured over their property, thus enabling the borrower to raise funds for use in their senior years and indeed retirement.

Obviously, there's more to it than that, so let's take a closer look at exactly how the Home Equity Release Mortgage scheme works.

How do Home Equity Release Mortgages work?

So exactly how do HERMS work? Well, as we mentioned, Home Equity Release Mortgage Schemes allow the homeowner to release a proportion of the equity in their home on the basis that the interest (charged at either a fixed or variable rate) is "rolled-up", and the borrower(s) need never have to make a single monthly mortgage payment.

The amount of equity that may be released from a property is dependent on the age of the borrower. The older the borrower, the higher the proportion they may borrow. Typically for a borrower aged 55, the proportion tends to be in the region of 15% increasing to a maximum of 55% of the equity for those borrowers aged 85 years.

Borrowers may choose how they receive their borrowings which may either be in the form of a single lump sum, or as a regular monthly drawdown to supplement pension income, or even as a combination of both formats should the borrowers require both a lump sum and a regular additional income.

What are the benefits of a Home Equity Release Mortgage Scheme?

So, what are the potential benefits of a HERM? Some of the main benefits of a Home Equity Release Mortgage product include:

All Equity Release products are now regulated by the Financial Services Authority (FSA).
The Safe Home Income Plan (SHIP) also covers all equity release schemes that Shire Direct arranges.
The borrower retains complete homeownership.
Most HERMS provide a No Negative Equity guarantee, which means that regardless of your mortgage balance, you will never owe the lender more than the value of your home.
Funds raised from a Home Equity Release Mortgage Scheme can be used to limit the extent of Inheritance Tax (IHT) by creating a charge on the Estate.
Some HERMS guarantee a minimum amount that can be left to your family.
Home Equity Release Mortgage Schemes are available to applicants as young as 55 years of age.
With a Home Equity Release Mortgage Scheme the borrower can choose how they are paid, be it a tax-free lump sum payment, a regular monthly income to supplement a pension income, or even a combination of both.

What about the possible drawbacks of a Home Equity Release Mortgage Scheme?

So with all the beneficial points listed above, surely there must be some drawbacks? Well, its certainly true that there are some very important considerations that must be taken into account with a Home Equity Release Mortgage Scheme...

The 'rolled-up' interest that is charged to your account and added to the principal sum can build up quickly. For illustration purposes, the balance will typically double in the timespans shown below, assuming application of the following fixed interest rates:
- At a fixed rate of 6%, the mortgage balance will double approximately every 12 years
- At a fixed rate of 7%, the mortgage balance will double approximately every 10 years
- At a fixed rate of 10%, the mortgage balance will double approximately every 7 years
The amount of funds you you could raise with a Home Equity Release Mortgage Scheme is usually less than you could raise on a Home Reversion plan, especially at younger ages.
If you repay a Home Equity Release Mortgage in the early years, you are likely to then have to pay Early Repayment Charges (ERC's).
As a result of raising capital or supplementing your monthly income, your state pension income could be affected.
The amount you leave as an inheritance to your beneficiaries will be reduced as your estate will be reduced.

As you can see there are some very important things to take into account. We always recommend that you talk these matters through with your family, particularly your beneficiaries before making any hasty decisions.

Other considerations...

Releasing Equity by way of a Home Equity Release Mortgage Scheme is a major decision, and should be thought about very carefully. Particular issues to think about include:

How an increase in capital or monthly income could affect any state benefits that you may be entitled to.
Your current capital and income needs, as well as into the future.
Inheritance provisions for your children and / or family.

Like we say, wherever appropriate, it would be prudent to discuss your plans with your family, and especially your beneficiaries. However, it is of course recognised that many people do not necessarily want to discuss their private affairs with their family. Indeed, many people these days want to enjoy the fruits of their own hard-earned labours and investments for themselves rather than leaving substantial estates to their children!

Why would I want a Home Equity Release Scheme?

In this day and age, pensioners are presented with a whole new lease of life when it comes to their retirement. Retirement offers the ideal time and opportunity for pensioners to follow the dreams that they have so far been unable to fulfil, or maybe have fulfilled, but just want the opportunity to do so again!

Yet unless pensioners have managed to save a substantial amount of money for their retirement, and / or receive a hefty pension income these dreams may indeed have to remain unfulfilled.

And that's where a Home Equity Release Scheme can help - by releasing the equity in your home, which by your retirement will most likely be fully paid for, you can raise a substantial sum of money to help you enjoy your retirement either as a lump sum, a regular supplementary income or a combination of both!

Many people in retirement choose to take longer and indeed more frequent holidays to more exotic and far-flung corners of the globe. A lot of retired couples plan a world cruise holiday for their retirement. These can be fabulously long and luxurious breaks, in beautiful locations - but aren't cheap! There is also a trend that is seeing more and more retired couples buy holiday homes in the Mediterranean, or perhaps you may even find a humble caravan more appealing!

Perhaps your children moved overseas and you'd like to visit them from time to time. Or maybe you'd like to treat yourself to a new car or carry out the home improvements you've never got round to arranging such as new fitted bedrooms, bathroom and kitchen, or maybe a conservatory, or other extension.

Maybe you'd like to pay for long-term care or even pay for School and University fees for your grandchildren or great grandchildren! Not only that, but you could also top up your pension by taking a regular supplementary monthly income.

Whatever you decide, you'll be pleased to know that the lump sum of equity released is tax-free and can be used for any legitimate purpose you'd like!

I'd like more information on Home Equity Release Mortgage Schemes, can Shire Direct help me?

Absolutely! It's our objective to ensure we provide all our customers with a first-class mortgage service. We are confident that you'll find us to be friendly, professional, and helpful. We'll discuss, explain and provide the most appropriate product, commensurate with your aspirations, needs and circumstances.

So, please don't hesitate to Contact Us if you would like to discuss the possibility of a Home Equity Release Mortgage Scheme without the worry of having to make monthly repayments!

Call us today on Freephone 08000 282 281, our lines are open daily (including the weekends!) from 8am until 10pm. Alternatively, you may prefer to enquire online at any time, it's both quick and simple to do!

We have the skills, the approach and the products to help you make use of your property to provide you with a better lifestyle in your retirement.

That concludes our look at Home Equity Release Mortgages (HERMS). We hope you found it to be helpful! Remember, you'll find much more information throughout our website, and we're only ever a free telephone call or couple of mouse clicks away and would love to hear from you and will be delighted to assist in any way we can.

Enquire Online now, or call us today 08000 282 281 - our freephone lines are open 8am-10pm everyday! We'd love to hear from you!

This is a Lifetime Mortgage. To understand the features and risks, ask for a personalised illustration.

^ Return to the top of our Home Equity Release Mortgage Schemes (HERMS) explanation

A look at Home Equity Release Mortgage Scheme (HERMS) and how Shire Direct can help!