Equity release is a way of borrowing against the value of your property to free up money. This could be to pay for urgent repairs, home improvements or to consolidate various debts. But there are pros and cons to equity release, and we would always suggest a cautious approach. Let’s look at how this type of loan works so you can make an informed decision.
In the current economic climate, many people have less disposable income than before. High inflation has led to rising interest rates, placing significant pressure on people’s finances. Although it’s hoped that interest rates will start to fall over the year ahead, we’ve seen an increase in enquiries relating to equity release.
What is equity release?
There are two main types of equity release:
- Lifetime Mortgage – this is a type of long-term loan which is borrowed against the value of your home. The lump sum received is in the form of a mortgage. The loan only gets repaid when your home is sold after you pass away, or if you move into a care home. It is usually available to people aged 55 or over (in some cases, age 60).
- Home reversion – this is scheme where you sell all or part of your home, but you would retain a right to live in your property. This would continue until you either moved into a care home or upon your death. Payments can be made as a regular income or as a lump sum. The scheme is usually available to those aged 60 or over.
Pros for equity release
Let’s explore a few advantages for equity release:
- You can live in your home
One of the main reasons people consider equity release is the fact they can access money without having to move house. Therefore, there’s no need to downsize if you enjoy living in your current property. - Tax-free lump sum
There is no tax to pay when you release equity on your home. Many people choose a Lifetime Mortgage when they want to extend, renovate or repair an aspect of their home. Some people use the lump sum for debt consolidation purposes, such as paying off credit cards and other types of loan.
- Interest only mortgage
For Lifetime Mortgages, you could choose an interest only mortgage, which allows you to repay the interest as you go along. This can help to prevent the overall borrowing sum from rising excessively.
If you need advice on equity release, please get in touch to speak to our financial planners. We can check if this is right for your situation. Over the years, we have seen many issues relating to equity release, so we would always recommend speaking to a trusted specialist.
Cons for equity release
Now let’s look at some disadvantages for equity release:
- You may get less than the value of your home
Home reversion schemes generally do not offer you the total market value of your property. Your health will be considered, and lenders could take a larger share of your home. Many providers of these schemes require you to be at least age 60. - High interest rates can quickly build up
When it comes to a Lifetime Loan, interest rates are usually higher than a standard mortgage. Any unpaid interest can quickly build up, resulting in an ‘interest roll-up mortgage’, and you end up repaying more in the long run. The risk is that the property value is used up while paying this off. - There will be less inheritance
When you release equity from your home, this will reduce the amount you can leave as inheritance. In some instances, you may be able to take out inheritance insurance, although you might not be able to borrow as much. If you’re planning on leaving a legacy for your children or grandchildren, equity release may not be the solution. - Look out for early repayment charges
For Lifetime Mortgages, there could be costly early repayment charges. This would apply if you decided to repay part or all of your loan sooner than expected. Watch out for early repayment charges from your lender on your existing mortgage too. This can occur when you make the switch to an equity release loan. - It can affect means-tested benefits
If you have an older family member or friend who’s interested in equity release, this can affect any benefits they currently receive. For example, if they are receiving pension credit or council tax support, they may lose this benefit.
Equity release only benefits specific people in certain circumstances, depending on age, health and their financial situation. The risk is that you end up paying back more than you originally borrowed, and your legacy will be diminished.
Financial Planner in Nottingham and Lincoln
As your financial planner, we can check your suitability by carrying out a financial review. In most cases, we usually advise other courses of action. But for some people, this could be a helpful way to free up some much-needed funds. Our aim is to make sure your money is protected for both your use and your family in terms of their inheritance.
If you’re considering equity release, we recommend having a financial review to explore all your options. Get in touch with our financial planning team.
Sources:
https://www.legalandgeneral.com/retirement/equity-release/guides/is-equity-release-a-good-idea/
https://www.ageuk.org.uk/information-advice/money-legal/income-tax/equity-release/
