Equity release can be life-changing, but it is a significant financial commitment. For this reason, you should make sure you have a good understanding of what it entails before making any decisions.
Equity release lets you tap into the wealth locked up in your home, without having to downsize. If you’re over 55 years old, you could release a tax-free lump sum of cash, or a steady stream of income to boost your earnings using equity release.
Sounds like a good idea?
Keep reading to get the full breakdown of Equity Release pros and cons.
Equity Release: How Does It Work?
In the UK, there are two main types of equity release available. By far, the most common is a lifetime mortgage.
With a lifetime mortgage, you can borrow money up to 50% of the value of your home. Exactly how much you can borrow depends on your age, health and property’s value. Generally speaking, you will be able to borrow more as you get older or if you suffer from certain chronic health conditions.
It is possible to take the money as a single lump sum or a smaller instalment, which can then be topped up as you need over the years.
On most lifetime mortgage schemes, you don’t make any payments on the loan as long as you are alive. When you die or move into long term care, your home is used to pay off the loan and any interest which has accrued.
The second type of equity release scheme is known as a home reversion plan. With home reversion, a lender buys a share in your home at a below-market price. As with a lifetime mortgage, it is possible to receive this payment as a lump sum or regular instalments.
You continue to live in your home and pay nothing on loan as long as you live. When you die or move into long term care, the lender claims their share in your property upon its sale.
Advantages of Equity Release
Equity Release: Make the Most of Your Assets
Equity release lets you make the most of your brick-and-mortar assets by releasing their cash value. Once you have the money, you are free to spend it as you like. Whether you want to renovate, go on holiday or purchase peace of mind by clearing other debts, the choice is yours.
Equity Release: No Need to Downsize
Instead of selling up and moving to a smaller house, you can tap into your own home’s equity for additional income instead.
Equity Release: End of Monthly Payments
When you take out equity release, you’ll be required to pay off what’s left of your mortgage first. Once this is done, you won’t have to make any monthly payments on your home unless you want to.
Equity Release: Never Owe More Than Your Home Is Worth
The Financial Conduct Authority regulates equity release providers in the UK. All regulated members offer a ‘no negative equity guarantee’.
This means that you can never owe more than the value of your home, so at the end of the loan term, your family or beneficiaries won’t be left out of pocket trying to cover debts from the equity release plan.
Equity Release: Avoid Inheritance Tax
Equity release can be used as a way to gift family members with a living inheritance, free of tax.
Equity Release: Flexibility
Using an Equity Release ‘drawdown’ facility (where you start with a small instalment and top up as you need), you can control how much debt have and limit the chance for interest to build upon your account.
Disadvantages of Equity Release
Equity Release: Mounting Interest
Because you never make payments on the amount you borrowed, your debt compounds interest at a startling rate. At the end of the loan term, it is possible that the majority of the proceeds from the sale of your home will need to go towards servicing your equity release debt.
Equity Release: Changing Your Mind Is Costly
Although many types of loan involve early repayment fees, equity release is known to have particularly steep penalties for quitters. It is not uncommon for lenders to charge up to 25% of the total borrowed if you decide you want to leave the plan before the end of its term.
Equity Release: Can Leave Family and Lodgers in a Tight Spot
According to the Financial Ombudsman, some of the most common complaints about equity release relate to disputes over the rights of family members after the death or decline in the health of the plan-holder.
Lodgers and family members- including spouses- do not have the right to live in the property once the loan comes to an end and may face high repayment fees if they want to clear the debt using other sources of funding.
Equity Release: Property Can’t Be Used As Security on Other Loans
Once you have released equity on your home, you can’t use it as collateral on any other loans- the equity release scheme must take priority.
Equity Release: Won’t Be Able to Leave Your Home as an Inheritance
In most cases, you won’t be able to leave your home as inheritance once you have taken out equity release on it. Some lenders may accept other sources of funding to clear your debts at the end of the loan term but could charge expensive penalty fees to do so.
Alternatively, a few lenders may allow you to ‘ringfence’ a portion of your home’s value, which will be left untouched by equity for cash inheritance. This will affect how much equity you can release.
Equity Release: May Affect Your Benefits
Equity release could cause you to lose any means-tested benefits you currently receive, such as pension credit or council tax reduction. Whether you take the money as a lump sum or drawdown facility, it will be considered in any means-tested assessments.
How Can Equity Tree Help?
Here at Equity Tree, we have partnered with some of the UK’s leading Equity Release broker companies.
They have already helped thousands of people release equity already, and they can do the same for you.
Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
If you would like to speak to one of these equity release companies, click on the below and answer the questions.