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What Are The Pros and Cons of Equity Release?

Property Saviour » Equity Release » What Are The Pros and Cons of Equity Release?

As you age, you may need to consider other sources of income. Equity release could be an option, where you can access the value of your home while still living in it.

However, this is a big decision and you should always get professional advice before proceeding.

Our guide covers the pros and cons, risks and pitfalls of equity release, helping you decide if it’s a good idea and where to find unbiased advice you can trust.

Table of Contents

What is equity release?

Your equity is the full market value of your home, minus any remaining balance on your mortgage. In other words, it’s the amount you’d receive if you sold your home for cash.

Even if you don’t want to sell, you may still be able to access a lot of this money. If you have paid off most or all of your mortgage, you can look into an equity release scheme.

This can provide you with a large sum of money to use while still living in your home. It can be very helpful for covering big expenses later in life, like long-term care. However, there are some drawbacks to accessing the value of your home in this way.

How does equity release work?

An equity release provider can offer you a lump sum or an income in exchange for part of the value of your property. You can do this by taking out a type of mortgage, or by selling that portion of your home with the condition that you can live there for as long as you wish.

To find out more about these different types of equity releases, read on.

What are the different types of equity release
An equity release provider can offer you a lump sum or an income in exchange for part of the value of your property.

What are the different types of equity release?

There are two main types of equity release:

  • Lifetime mortgage
  • Home reversion

Lifetime mortgage

This type of equity release is the most popular. You can take out a mortgage in the form of a lump sum, and repay it when you die or move into long-term care, by selling your home.

The amount of money you can borrow is usually between 18 and 50 per cent of the property’s total value – and this amount increases with age.

You have the option to pay off the interest as you go, to reduce the amount you owe (an ‘interest-paying mortgage’) or you can opt for an ‘interest roll-up mortgage’, with which the interest compounds over time and the total amount you owe increases.

Most providers now offer a ‘no-negative-equity guarantee’, so the debt can never exceed the sale value of the property. It’s possible that all of the property’s value could be used to repay the mortgage.

Those who have a serious health condition or an unhealthy habit, such as smoking, may qualify for an enhanced lifetime mortgage. This means they can borrow more or pay lower interest.

Home reversion

With a home reversion scheme, you can sell either all or part of your home. However, you still get to keep living there until you pass away or move to long-term care. You get to choose how you receive the money – either as a lump sum or a regular income.

Keep in mind that you won’t get the full market value of your property when you sell it. Some providers may require you to be over 60 to qualify. Generally, the older you are when you take out the scheme, the more money you will receive.

Your state of health is also taken into account – if you are in a poor state of health, you usually get a bigger portion of the value of your home.

Are there any other forms of equity release?

It is possible to bypass the middleman and create your equity release plan. A few ambitious people have attempted to replicate the French viager system by selling their house privately at a reduced cost in return for permanent occupancy rights.

This could offer more value, but it is not easy and requires expert legal and financial advice.

What are the benefits of equity release?

Equity release can be beneficial in many ways:

  • The clear benefit of equity release is that it allows you to access money now, rather than having it locked away in your home.
  • House prices in the UK have risen significantly over the years, meaning many homeowners have a large amount of wealth tied up in their property.
  • Equity release can be a great way to tap into some of this money to supplement your retirement income, rather than leaving it all to your beneficiaries or to cover the costs of long-term care.
What are the risks and pitfalls of equity release
You will receive much less than if you sold it on the open market, though of course then you'd need to find a new place to live.

What are the risks and pitfalls of equity release?

Eequity release schemes can be helpful, but there are also potential risks and pitfalls associated with them:

  • The biggest disadvantage of equity release is that you don’t get the full market value of your home.
  • You will receive much less than if you sold it on the open market, though of course then you’d need to find a new place to live.
  • Equity release will also reduce the inheritance your beneficiaries could expect to receive. The exact risks depend on the type of plan you choose.

The risks of a lifetime mortgage

With a lifetime mortgage, you could owe far more than you borrowed when it comes time to sell the home – up to the total value of the property (but not more).

This is because a lifetime mortgage (similar to a regular mortgage) accrues compound interest. If you don’t pay off the interest regularly, the entire sum will compound quickly – for example, at a 5% interest rate, the amount you owe would double every 15 years.

This is a good reason to be careful when taking out a lifetime mortgage, especially if you want to leave an inheritance for your family.

To reduce the risk, you could pay off the interest as you go. Alternatively, you could take out a series of smaller lifetime mortgages over time. This way, you won’t be paying interest on the full sum for the full time, so the amount you owe in the end will be lower.

In addition, your money may be better off invested in your home (where it’s likely to grow) than in a cash bank account.

Plus, having large amounts of money in your account may reduce the benefits you are entitled to, including assistance with the cost of care. The value of your home is not included in any means test as long as you live there – but any cash in the bank would be.

Can I end a lifetime mortgage early?

If you choose to end your lifetime mortgage early, it may incur a cost. It’s important to speak with a financial adviser as soon as possible to find the most cost-effective way of managing your finances if you’ve simply changed your mind.

It’s best to discuss all of your plans with your adviser ahead of time so that you’re less likely to change your mind. If you wish to move home, you can keep your scheme running as normal.

Remember to inform your equity release company so that they can assess if your new home is of similar value.

What Are The Pros and Cons of Equity Release?
It's important to ensure that your home reversion contract allows you to move if necessary and that there are no hidden clauses that could cause issues or expenses later.

The risks of a home reversion scheme

The main disadvantage of home reversion schemes is that you usually receive no more than 60% of the market value of your home, and often much less (as low as 30%). Additionally, your home must be vacated shortly after your death, typically within a month.

This can be a burden on your family, who must take the time to sort your belongings and clear the property, in addition to planning the funeral.

It’s important to ensure that your home reversion contract allows you to move if necessary and that there are no hidden clauses that could cause issues or expenses later. Have both a financial adviser and a solicitor review the contract to make sure it’s in your best interest.

Be sure to have your independent financial adviser or mortgage broker explain the risks associated with any form of equity release, including the potential cost to your family in the long run and whether downsizing might be a better option.

For more advice and tips to avoid potential horror stories, continue reading below.

Am I protected when using equity release?

The Equity Release Council was established to protect people from any potential pitfalls of equity release schemes.

Companies that feature the Equity Release Council logo on their marketing materials guarantee that you can remain in your home until you die or move into permanent care.

Additionally, they are obligated to ensure that you will never owe them more than the total sale price of your home, even if the value of your home decreases. You also have the right to have a solicitor review all documents before signing up for a scheme.

Is equity release a good idea for me?

Whether equity release is the right choice for you or not depends on your particular situation. Here are some reasons why you may want to consider it:

  1. Your other savings and income sources may not be enough to cover your needs in retirement.
  2. You don’t want to (or can’t) downsize.
  3. You don’t mind reducing your family’s inheritance (or you have no heirs).
  4. An independent financial advisor has advised you that this is the best option for you.

On the other hand, here are some reasons why you might choose an alternative to equity release:

  1. You can cover your income needs in retirement with other sources.
  2. You have the chance to release money from your home by downsizing.
  3. You would like to preserve as much of your estate as possible for your family to inherit.
  4. An independent financial advisor told you that this option is not the best one for you.
When can I use equity release
Be sure to use a provider that is a member of the Equity Release Council. This will ensure that you are properly protected from any issues such as negative equity.

When can I use equity release?

The minimum age for taking out a lifetime mortgage is generally 55. Whereas, for a home reversion scheme, the minimum age may be 60 or 65.

Six equity release tips

Here are six tips to help you with equity release:

  • Take advice first

Before deciding on whether equity release is the right option for you, consult an independent financial adviser or mortgage broker who specialises in this field. They can provide impartial advice and help you to find the best deal if it’s the right choice for you.

  • Use an accredited provider

Be sure to use a provider that is a member of the Equity Release Council. This will ensure that you are properly protected from any issues such as negative equity.

  • Choose the right form of equity release

Your adviser can help you to decide what the best form of equity release is for you and your family. This will depend on a variety of factors, such as how much you would like to leave as an inheritance.

  • Borrow in stages

When taking out a lifetime mortgage, it can be more cost-effective to take out a series of smaller loans instead of one large loan. This will mean that you pay less interest in the long run.

Alternatively, you could consider paying off the interest as you go so that it doesn’t add up.

  • Check your benefits situation

If you are receiving any benefits in addition to the state pension, consider how they might be affected if you were to use equity release. If your benefits are reduced, equity release may not be the most beneficial option for you.

Your adviser can help you to understand this further.

  • Consider alternatives

Think about other sources of income such as downsizing or renting out a room. This will help you to be certain that equity release is the best option for you and your circumstances.

How to find equity release advice?

Many mortgage and financial advisers listed with Unbiased provide top-notch, impartial equity release advice.

Opting for independent advice ensures they won’t suggest any scheme unless it’s in your best interests. Furthermore, their advice is regulated by the Financial Conduct Authority (FCA), giving you an extra layer of security.

How can we help further?

Did this article help you? Our other articles may be of interest, too! Want to know more? Contact us and we’ll be happy to share more information!

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