Since the Coronavirus pandemic took hold of Western Europe, the UK’s economy has taken a battering.
The economy as a whole has shrunk by a record 20% over a matter of months, and gloomy economic forecasts predict it could take at least three years before the bottom-line returns to a pre-Coronavirus state.
If you hold stocks and shares, now is not an ideal time to be cashing out your investments- even if you desperately need the money.
Many of the UK’s largest companies have experienced losses and are taking extreme measures to try and stay afloat, including freezing dividend payouts.
If you’re in urgent need of cash due to your own financial circumstances, you may be tempted to sacrifice your investments by cashing out, even if it means making a loss.
However, there could be an alternative to pulling out at a time when many stocks are in the doldrums.
If you’re a homeowner, equity release could allow you to access the lump sum you need without touching your investments, so your portfolio can remain intact until the economy starts to make a recovery.
What Is Equity Release?
Equity release allows homeowners over the age of 55 to borrow money from the value of their property. The cash is released as a tax-free lump sum or as a steady stream of income, depending on your personal needs.
You don’t make any repayments on the debt and continue to live in your home. Because you don’t make any repayments on the loan, the interest on equity release borrowing can mount up quickly. However, if you borrow with a regulated lender, you will never owe more than your home is worth.
The debt, plus any interest, is paid back when you die or move into long-term care.
How Does Equity Release Work?
There are two types of equity release scheme available in the UK: lifetime mortgages and home reversion plans. The minimum age for a lifetime mortgage is 55, and 65 years old for a home reversion plan.
A lifetime mortgage is a loan with a fixed interest rate which is secured against your home. Unlike a regular mortgage, you don’t make any repayments. Instead, interest is added to the money you borrowed, which is paid back in full when you die or move into long-term care using funds from the sale of your house.
When you take out a lifetime mortgage, you can choose to withdraw all the equity at once in a lump sum, or withdraw smaller amounts as you need them, in a ‘drawdown’ plan.
Equity Release Home Reversion Plan
In a home reversion plan, a lender buys a share in your property at a below-market price, while you continue to live in your home as normal. When you die or move into long-term care, the lender recovers its investment through the sale of your home.
You can choose whether to release the equity in one lump sum or to receive a regular stream of smaller payouts from your lender.
How Much Does Equity Release Cost?
Equity release can be quite an expensive way to borrow. That does not mean it is necessarily a bad idea, but it is important to understand the costs and benefits to decide whether equity release is right for you.
In a lifetime mortgage, you don’t make any repayments on your loan while you alive. This means that the interest on the loan compounds on an ever-increasing total, and so mounts up very quickly compared to a repayment loan.
For example, £60,000 in equity borrowed over ten years at 5% would result in a lump sum of £98, 820 to be repaid from your estate when you die.
This debt roll-up is one of the major drawbacks of equity release. However, it is possible to minimize the impact of compound interest: making payments on the loan interest while you are still alive or reducing the amount you borrow is a couple of ways to avoid this debt roll-up.
Why Should I Opt for Equity Release Now?
More than 9.3 million people have been forced to take a leave of absence since the start of 2020, and over half a million have been made unemployed.
Many people in difficult financial situations are now falling back on their savings and other investments to help them through this difficult financial period.
However, because so many savings and investment vehicles have stakes in the stock market, your pension pot or ISA may not be looking as bountiful as expected. Similarly, if you buy stocks and shares directly or through a fund, you could be feeling reluctant to liquidate your investment when the market has taken a hit.
Instead of risking losses on your investments, you may consider whether equity release is an option that could work for you.
So far, the housing market has only taken a small dip as buyer delayed moving through the lockdown period- so your home is likely to still be worth close to what it was before Coronavirus emerged.
If you decide to release equity on your home, you can withdraw a lump sum of up to 50% of its total value and won’t have to make any repayments on loan for as long as you live there.
In addition to this, if you are a homeowner, there is almost no doubt that you will be eligible for an equity release plan. Unlike unsecured lending, such as credit cards and personal loans, equity release is secured on your property.
This means that it is available even if your income has decreased or you have been made unemployed.
Is There an Option to Pay Off an Equity Release Plan Further Down the Line?
If you are considering whether to use equity release to fill a financial gap while your investments recover, you should think about what the long-term effects of this decision will be.
Equity release is best-suited people who plan to stay in their home for the rest of their lives and don’t plan to pay it back.
Although most equity release providers allow you to pay back the money you borrowed early, there may be a costly early repayment fee to do so. Some lenders charge a penalty of up to 25% of the total you borrowed if you would like to pay off your debt early.
Can I Move House After Taking Out an Equity Release Plan?
If you expect to move house at some point in the future, you should be able to take your equity release plan with you as long as the new property has enough equity to cover your debt.
If the home you plan to move to has a similar value to your current property, this should not be a problem.
However, if you want to downsize, you may have to repay some of your debt early, which can incur fees.
Pros and Cons of Using Equity Release Instead of Investments
|Leave your investments untouched until the economy start to recover||If you change your mind later on, it can be expensive business repaying your loan early|
|Give your investments longer to mature||If you decide to move house again, you may need to pay additional fees|
|Avoid disrupting your savings and investment plans for the sake of a short-term crisis|
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.