23 July 2015
More and more often we are hear the term “equity release” as an option to ease financial woes or taking money out of a home without having to move… but what actually is equity release. What are the advantages and disadvantages of this route?
So What Is Equity Release?
Over recent decades the housing market has generally grown and the value of houses have increased significantly over the last 30 years. This leaves many homeowners in their later years with large amounts of money / value (equity) in their home, but yet they have retired and may have little in the way of cash reserves or savings.
If there is equity in a house, an equity release product allows an owner to take some of that cash out the house without having to move. The minimum age to be accepted in to an equity release scheme is 55, although this can vary according to the provider.
There are 2 types options of equity release to choose from:
- Lifetime mortgage – this is where there is a mortgage against the property, but unlike a traditional mortgage there are no repayments until the equity release company will take their share (including interest they accrue on what you borrow) once the owner dies or moves house.
- Home reversion – here you can sell part or all of the home to an equity release company which will give a lump sum or as regular smaller cash instalments. You have the right to keep living in the house but you must maintain and insure it. Once you die you will receive between 20% – 60% of the market value of the house, or the part you have sold.
The Pro’s And Con’s
It’s worth pointing out that individual circumstances vary and we would recommend seeking the advice of an independent financial advisor to discuss your specific situation.
However, some of the key advantages and disadvantages are listed below:
- Provides the ability to raise tax free cash without having to move home or downsize.
- They can provide either a large lump sum of cash or regular mounts when its needed in later life.
- It can be used to pay off expensive debt, such as for a car, secured loans or even the mortgage.
- The money could also be used for home improvements or funding for care which often is a key influencing factor in later life.
- Large cash deposits can be used for gifting to children which can help them put a deposit on a new home and start on the property ladder.
- You can raise money and no monthly repayments are required.
- It’s a highly regulated (by the FCA) sector with upmost consumer protection.
- They provide a negative equity guarantee – no matter what happens you can never owe more than the value of your home.
- Negative equity schemes are expensive. The value of your estate you are likely to leave to your beneficiaries will be reduced, and with the government currently looking to increase the inheritance tax threshold on home to £1,000,000 – this is an important consideration.
- It can affect your social security benefits – as benefits such as pension credit and council tax benefits are means tested, if you use the money to increase savings this can impact your ability to receive these benefits.
- Be wary of early repayment charges. As these schemes are set up to run for the rest of your life, if you circumstances change and you want to repay early then there can be substantial charges.
- Set up costs can be high, which will include a valuation fee, solicitor fees, application fee and any advice costs – so ensure you know those costs in advance.
- Another disadvantage of an equity release scheme is its secured against your home, so should you want to re-mortgage at any point in the future, this may be more difficult.
There is no doubt that equity release schemes can be useful, but like most things they come at a cost so think carefully and seek the appropriate advice before you enter into a scheme.
So What Are The Alternatives?
- Unsecured loans – depending on the amount you want to borrow and if you can meet the repayments from the retirement income you have – an unsecured loan may be a cheaper option.
- Moving and downsizing – there are costs associated with moving house, but if you move home to a smaller property it will allow you to keep more of the value of your property. Bear in mind any costs such as stamp duty, solicitors estate agents etc. An option to consider here is using a Quick Sale company who buy your house for cash. They will often give you up to 85% of the market value of your home, but they also take care of all the associated selling costs.
- Mortgage extensions – depending on your age and circumstances this may be an option for you if you haven’t already paid off your mortgage.
Remember to take good independent financial advice before making important decisions.