This article was last updated on 1 September 2020.
In recent years equity release has become a very popular option among retirees who own their property but do not have lots of money in the bank. To put it simply, this is a method of borrowing money on the total estimated value of your estate so that you can enjoy your retirement to the full without having to sell your home or having to scrimp due to lack of funds.
The most popular type of product that people use is called a lifetime mortgage.
In this article, we look at the benefits and drawbacks of equity release. Typically customers choose to take out a lifelong mortgage.
Read on to discover their potential assets, as well as the downside of equity release.
Before we share the tips below, here is a short video that sets out some of the pros and the cons of releasing equity. We do recommend that you watch this as whilst there are many advantages, there are disadvantages that you should consider.
Here is a video outlining the pros and cons of equity release.
Research from Age UK shows over 15.3 million British citizens are now aged 60 and above. Therefore, it’s no surprise that products, such as lifetime mortgages, are seeing a surge in popularity.
As per the reasons outlined above, they are a good way of providing yourself with a steady source of income, or ‘pension pot’, whilst at the same time allowing you to maintain the lifestyle you want through later life. As well as enabling you to pay for luxuries like a holiday, or home improvements, they can be beneficial for your health as they help you to pay for long term care.
Also, with the cost of getting on the housing ladder so high, a lifetime mortgage is a way for parents to assist their kids with buying their first home. For some, passing their estate on when they die is likely to be too late, and they want to help their children out now.
This solution enables them to, as they can give all or part of the loan amount obtained from their home to their children. However, before making this decision you should speak with your family and seek advice using the number below.
There are several advantages and disadvantages to consider, and it’s important to speak to an independent financial adviser (IFA) before making a final decision.
Recently, the lending criteria have improved and competition between providers has brought interest rates down. However, taking a lifetime mortgage certainty isn’t for everyone.
We would certainly recommend getting your questions answered by a specialist before you finalise anything. You can get some free advice and discuss things by calling 0800 953 3792.
Read about the equity release ‘pros and cons’ below
Homeowners receive some of the value of their property without having to sell it or move to a smaller property. This means that elderly home owners can enjoy their home right up until their death if they wish. The advantage of this is that you avoid the expense and stress of moving home that comes with downsizing.
The sums that are released on the value of the property are not subject to tax. This tax-free cash can provide an essential form of retirement income, giving you peace of mind and a retirement free from stress.
Many schemes provide a series of regular payments rather than a lump sum. This supports recipients, as they can manage their budget more effectively. Therefore, if you are worried about making your money last you should choose a plan that offers regular payments in its terms.
Unlike other forms of loans, recipients do not have to worry about keeping track of or struggling to make monthly repayments. If you wish to reduce the final lump sum that needs to be repaid, you can choose to make monthly payments towards your debt. However, in most cases, you can avoid the problems and penalties associated with this commitment, and opt. for the total debts to be repaid on death or sale of your home.
Most providers who offer packages are members of the Equity Release Council(ERC) and are bound to abide by strict rules and regulations. This gives you security and confidence in your lender.
One of the most important conditions of membership to the ERC is offering a no negative equity guarantee. This means that if the value of your home happens to fall below the amount borrowed, the homeowner will not be asked to pay the difference. Consult independent advisers to find out what lenders are part of the ERC.
The interest charges are usually fixed for the entire duration of the loan and tend to be a whole lot lower than for most types of traditional lending. Therefore, equity release schemes often have lower expenses associated with them.
Individuals that receive money have the option of making cash gifts to their relatives and loved ones during their life so that friends and family do not have to pay inheritance tax. This can be an effective way to pass your wealth on, increasing the portion your loved ones receive.
Generally speaking, recipients of a mortgage do not have to repay the money unlocked or even the interest on the loan until they either die or decide to move into long-term care.
This means that until that point, the plan will not cost you anything except the set-up and/or advice charges. The official name given to this interest is ‘compound interest’.
There is no limit on the ways that recipients can spend their newfound cash. Whether they decide to take a well-deserved rest by going on holiday, provide their family with cash or renovate with home improvements, the choice is entirely theirs. If you take out an equity release plan you are free to access and spend your cash as you wish.
Of course, there are some disadvantages, and an equity release scheme is not right for everybody. Particularly, if you do not need the money then you should think carefully about taking a mortgage. An equity release plan is typically used to provide an income but if you have this elsewhere, perhaps through a pension or savings, then you may not need to use it.
Before making a decision you should always talk to a qualified financial adviser to get equity release advice and information. A professional will be able to help you understand whether it is right for you and explain the different products available, such as a home reversion scheme. Depending on your product, plan, and personal circumstances, a mortgage can be an expensive way to borrow money.
Get some instant ‘over the phone’ advice by calling 0800 953 3792.
Whilst there are obvious pros and cons of choosing to release equity, we have set out more cons below. It’s important to discuss these risks with a financial adviser, as they can give you information and help you make decisions based on your situation. They can also use their experience to suggest alternatives, such as downsizing, renting out a room, or using your other assets and investments.
The details of each plan vary depending on the details, the company you choose, and the market value of your home.
You will receive a portion of the total value of your home, depending on your situation, for example, your health and age. Typically, plans will offer a proportion in the range of 25-50% of your property value. As you get older, your entitlement generally rises.
You should also consider the costs involved, and deduct these figures from your loan amount.
For example, you might need to consult a solicitor to check your legal documents or an adviser for help with the pros and cons of equity release.
Use the calendar to book an appointment with a specialist to see how much you could receive
One drawback is that upon the instance of death, loved ones will not be able to inherit the full value of the property. You may wish to discuss this with your family, for instance, to ensure funeral costs can still be covered.
Those who wish to quit their policy are likely to find that they are charged an early repayment penalty, which may be rather high. For this reason, you should seek advice if you think you might want to end a plan early.
People who receive certain means-tested benefits such as free eyeglasses, dentistry, pension credit, and council tax and pension credit could find that deciding to opt for a plan affects this support.
Luckily, for those over 65, state pensions aren’t affected. However, in this case, other benefits may still be at risk. Ultimately, this is dependent on your circumstances and the borrowing purpose. It’s really important that you take a close look at what kind of payment amounts you’re receiving, or expect to receive, from the government.
Also, consider how taking a lifetime mortgage could impact your long-term care plans if you are expecting to receive support. The added expenses of care, alongside your debt, might not be worthwhile.
There are several different fees incurred in the process of setting up a loan such as the application fee, the valuation fee, the solicitor’s fee, and even the cost of seeking advice. Check how much the business charges before signing anything.
People who wish to remortgage their property at a later date are likely to find that their choices are rather limited. Speak to the equity release company before signing a contract, to find out the expense of a remortgage of your home later down the line.
Because the value of the equity release loan is directly linked to the price of the property at the time when the policy is taken out, people who hold this sort of policy will not receive extra cash if the market value of their property rises.
This is something you should consider carefully. An interest rate of 5.5%, for example, compounded annually on a £100,000 lump sum amount, would add interest costs over a ten-year period of over £70,000.
That could mean there’s less value left in your home to pass on to loved ones. This could become a further problem if house prices don’t rise or if they fall. It could also make covering funeral costs tricky.
The good news is that reputable equity release products come with a “no negative equity guarantee”. All products provided by those providers who are members of the equity release council and are authorized and regulated by the financial conduct authority (the FCA) sign up to the “no negative equity guarantee”.
What this means is that should house prices collapse or if the rolled-up interest is higher than the house price, your beneficiaries will never owe more than the value of the property.
Here is a short video on how a lifetime mortgage works.
Equity release is authorised and regulated by the financial conduct authority (FCA). They ensure fair practice by your provider and check the features of your policy are satisfactory. All firms selling or offering a guide to equity release must be a member of the FCA.
In addition to the above, you should get in touch with an advice team. They can provide you with information on which equity release companies to avoid.
There is a whole range of factors involved, and therefore you must consider the policies and risks carefully. Take the time to shop around, and never sign a deal without speaking to advisers about the advantages and disadvantages.
There are several reputable providers available to choose from and potential clients should read reviews from previous clients before signing. Make sure that you read all the small print included in the policy material, too.
It is also wise to discuss the idea with loved ones and seek their input to avoid disputes in the future. This is because your decisions can affect the portion of your wealth they receive.
The most popular type of equity release products is lifetime mortgages. You may read more about how the mortgage works by clicking here. The other more popular choices are drawdown mortgages and Home Reversion Plan.
The table below sets out the best equity release interest rates available today.
|Equity Release Provider||Rate||Key Feature|
|Legal & General||2.1%||Cashback and free valuation|
|Pure Retirement||2.49%||10% per annum partial repayment option|
|Legal & General||2.9%||Cashback and Free Valuation|
|More 2 Life||2.9%||Downsizing repayment charge exemption|
|Aviva||3.1%||3 year no early repayment charge|
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