What is Equity Release?
First, equity is the overall market value of your property, minus any mortgage
that is yet to get paid off. It’s the total amount you’d receive if you sell
the property to get cash.
Although you can still access much of these funds even when you don’t want to
sell your home, considering that you have cleared most of your existing
mortgage, it serves well to look at an equity release action plan. The pros and cons details you will find below will be of
great help for you in making the decision and feeling secure about it.
How does Equity Release Work?
An equity release broker supplies you with either a lump sum or sizeable
payments for the part of the value of your home, achieved through selling part of your home, or using a mortgage, with the
condition that you can carry on living there until you can’t.
With an equity release, you’ll have the privilege to access colossal sums of money and spend whilst remaining able to continue living in your home.
However, there may be downsides to accessing the equity value of your home in
this manner.
Advantages of Equity Release
The most significant advantage attained from equity release is that it gives
you access to funds you can use immediately, as opposed to leaving the value
locked away in your property. The overall rises in property prices entail a
large proportion of homeowners having their wealth accumulated in their
properties but remains inaccessible.
Consider the fact that your home has been increasing in value over the years,
but the amount remains on paper and not as cash you can spend. Equity release
will allow you to get some of that money and supplement your income during
retirement, rather than leaving all of it to your beneficiaries, or perhaps to
cover your care costs.
You Can Live on Your Property
An equity release plan is a suitable alternative to downsizing (selling your
current property and moving to a less expensive one, whilst using the price
difference to boost your retirement income.)
Equity release entails you not having to move and face the stress and expenses
of relocating.
Your Monthly Expenditure Doesn’t Increase
You will not repay the money accessed through equity release, neither will you
pay the interest on it up to the time you move into long-term care or perhaps
are deceased.
An equity release plan will not cost you a thing, apart from set-up or advice costs, if any.
Spend The Money as You Please
Once you get an equity release, you can use it for any expenses such as home renovations, vacations, or to enhance your retirement
income flow. You can also help your family financially by taking the money out
of your home only when you need it.
Some providers will allow you to use the “drawdown” plan, which enables you only to
release funds as and when you need them. Another important point is to learn
about the main pros and cons of multiple providers to choose the most suitable
one.
Pay Necessary Interest
Depending on the plan chosen, you will only pay
interest
on the cash you have released, and this approach will help keep the interest
bills low.
Risks & Downsides of Equity Release Schemes?
One significant disadvantage with equity release is that you will not receive
payment of the total market value of your property. The money will be less
than you will get if you sold the property on an open market.
Reduced Inheritance
One other downside of equity release is the reduction in the total amount of
inheritance that your beneficiaries are otherwise receiving afterwards.
The specifics may differ depending on the plan you choose.
Possibly Owing More in Future
Perhaps you take out a lifetime mortgage. You risk owing more than you had initially borrowed at the time the home
goes on sale – only up to the total value of the property, though.
Mainly because a lifetime mortgage charges compound interest (like a regular
mortgage). And not paying off interest at regular intervals results in the
entire sum compounding. For instance, an interest rate of 5 percent would cause the amount you owe to double every 15 years.
Thus if you hope to leave a fair inheritance for your family, be cautious
of how you select a plan for a lifetime mortgage.
Though you can reduce this risk if you pay off the interest as you go, or you
can take out a series of smaller lifetime mortgages as you need them.
Another good reason for this is that your money stands a chance to compound as
well if it remains invested in your home (where it is likely to grow).
Reduced Benefits
Having colossal sums of money in your bank account (from the equity release)
may deplete the benefits you are eligible for, such as help with costs of
care.
Your home’s value will not undergo consideration as long as you are living
there. However, having cash in the bank will be.
How am I Protected When Using Equity Release?
The Equity Release Council is the prominent body-protecting people from incurring losses when you
take out an equity release. It mandates any equity release organisation that
has the Equity Release Council logo appearing on their material to ensure that
you live in your home until you die or move into a care home.
They must also make sure that you never repay them more than the overall price
of your home, regardless of its value drops.
You may also ask a solicitor to check all documentation before you sign up to
a plan.
How Soon Can I End a Lifetime Mortgage?
You can end your lifetime mortgage before it’s due, but this may cost you.
Suppose you want to change your mandate regarding your equity release. In that
case, you must speak to your financial advisor immediately and sort out the
most cost-effective way you can organise your finances.
If you want to change homes, you must notify your equity release company so
they can evaluate if your new home is equal in value to your initial
registered home. If so, you may keep your scheme running as expected.
Tips When Considering Pros & Cons of Equity Release
#1. Get Professional Advice
Be sure to consult a financial adviser that specialises in equity release and
is independent. They will give you unbiased advice regarding the best option
you can take and find you the most profitable deal.
#2. Get a Renowned Provider
Ensure that the provider you choose is in the registers of the Equity Release
Council, so it protects you from any shortcomings like negative equity.
#3. Select an Appropriate Equity Release Plan to Benefit You and Your Family
Regardless if it’s a lifetime mortgage or a home reversion plan, what’s best
for you will differ depending on the set of circumstances you’re in, such as
how much inheritance you want to leave your family.
#4. Borrow Stepwise
Especially when you are using a lifetime mortgage, taking out a series of
sizeable amounts is more cost-effective than getting a lump sum, because then
you get to pay less on interest.
Consider avoiding to let the interest compound and pay it off as you
progress.
#5. Check the Situation of Your Benefits
Perhaps you are getting other benefits besides a state pension; you must check
how an equity release may affect these benefits. Losing benefits might cause
equity release to lose beneficial value to you.
#6. Look at Your Alternatives
Try to consider all alternative sources of income, like downsizing or perhaps renting out a part of your property. Only then will you accurately determine if equity release is the best option for your circumstances.
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