Just as with any loan, there are always pros and cons of equity release. Depending on your circumstances it may solve a tricky financial shortfall for you, but it could also cause problems for you or your family further down the line.
Equity release allows you to release a tax-free cash lump sum from your home. However, it will have an impact on the estate you leave behind for your loved ones when you die.
A significant positive of Equity Release is being able to release a tax-free cash lump sum from your property.
We’ve got you covered – read on to make sure you’re fully aware of the pros and cons before you make your decision.
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The main pro of equity release is that it gives you access to a large amount of money that would otherwise be tied up in your home. As property prices have increased over the years, many people are reaching retirement age and finding out that most of their money is locked up in their mortgage.
And that leads onto the other main pro of equity release – you don’t have to leave your home, no matter which option you decide on. Whether you choose to re-mortgage with a lifetime mortgage, or you instead prefer the home reversion route where your property is sold, you’re able to live in your house until you either pass away or go into care.
Alternative options that may be more financially beneficial could see you needing to find somewhere else to live, which you may not wish to do.
There are, of course, a number of pitfalls of equity release. You won’t get the full value of your property in your loan, whether you’re re-mortgaging or selling it through a home reversion plan. So, you’ll be losing out on money that’s yours in order to retain the benefit of living in the property.
With a lifetime mortgage, you could also owe a lot more than you originally borrowed. That’s because the interest will continue to build as soon as you’ve borrowed the money. Providing you’ve chosen a ‘no negative equity’ loan, the repayments will never exceed the value of your home, so your dependents won’t have to dip into their own pockets to repay.
Traditionally those aged over 55 will begin to see a reduction in their regular income as their employment status changes. As a consequence, if looking for traditional equity release plans (i.e. remortgages), it can be difficult if not impossible to pass the mortgage affordability test.
This is a test introduced by the authorities to try and prevent a repeat of the 2008 US mortgage crisis which brought the worldwide economy to its knees. However, the mortgage affordability test only covers mortgages where there are regular repayments.
Therefore, whether looking at a lifetime mortgage or a home reversion plan, there are no such regular repayments. As a consequence, there is no need for a mortgage affordability test which opens the door for many over the 50s who would struggle to remortgage their property and release equity.
But, with a lifetime mortgage or a home reversion plan, they will lose out on some of their inheritance. You can ring-fence part of your property with any equity release loan so that something definitely goes to your family, but this will then have a knock-on effect on how much you receive.
Finally, your money will lose value faster over the years if you’ve chosen an equity release plan. Broadly speaking, your money is worth more if it’s left tied up in your property, as house prices will grow faster than any bank interest rate.
So, if you can avoid equity release, you’ll be leaving a much more valuable property behind when you pass away. Once you’ve finished weighing up the pros and cons of equity release, you’ll start to get an idea of whether equity release is a good idea for you and your circumstances
A lifetime mortgage is an equity release loan that lets you borrow up to 60% of the value of your home, without selling it. Exactly how much you can borrow will depend on how old you are, and how valuable your property is.
You then don’t have to make repayments – instead, interest builds up. When you then die or move into long-term care, the debt is payable from your estate – the likelihood being that your home will have to be sold to cover it. However throughout, the property remains yours until this happens.
You’ll get the money as a lump sum, which you can use to either purchase an additional annuity or spend it on whatever you want.
Therefore, when it comes to a lifetime mortgage, the interest (which will usually be higher than that of an everyday mortgage) builds up and accumulates, usually until the homeowner dies. At that point, the property will either be sold to repay the lifetime mortgage, or it will be refinanced, to pay off the lifetime mortgage’s capital and interest. Lifetime mortgages will also tend to have fixed interest rates although there are providers who will offer them on a variable basis.
It is important to note though, that you cannot release more equity than the property’s value and will also never be required to repay more than the property’s value, but this can be a significant amount of money. Furthermore, when it comes to wills and probate after death, the lifetime mortgage will need to be repaid as a priority which will usually require the sale of the property or the purchase of the additional equity by the lender.
This statistic illustrates the average age of new customers for all equity release plans agreed in the United Kingdom (UK) from the first half of 2014 to the second half of 2019, by type. Equity release plans are designed to allow homeowners to access some of the value of their property without the need to sell their house and move out. It can be seen that the average age remain overall on the same level during this period. It was approximately 71 years of age as of the second half of 2019 for new drawdown plan customers and 68 for new lump sum plan customers.
A drawdown lifetime mortgage only differs in that you don’t get given the money upfront. Instead, you have what is essentially a credit limit. You can withdraw (“draw down”) any amount up to this limit whenever you want.
A drawdown mortgage is much better if you don’t need to borrow a lot immediately. That’s because you’ll only build up interest on the amount you’ve actually borrowed, not the total limit that’s been agreed. So, if you take out less upfront, your interest won’t build as quickly, which leaves more money once you’ve passed away or gone into care for your estate.
If you instead choose a home reversion plan, you’ll sell your house to the lender, rather than keeping it in your name. The price you get won’t be for the full property value, and it could be as low as 20%, depending on various factors. You’ll still have the right to live there until you pass away or move into care.
Again, with home reversion, you have two options on how to take the money. You can either choose the cash sum up front, or you may prefer to receive regular payments as an income, to help you out on an ongoing basis.
When you die, or when you move into a care home, the lender will sell your property on the free market and keep the funds generated.
With both lifetime mortgages and home reversion plans, you have the option to ring-fence part of your property and stop it from being included in the agreement. This means you’ll get less money, but it protects it to pass on to your family once you’re gone.
Although there is no ‘type’ of person who equity release is limited to, there are a number of qualifying criteria to consider. Due to the nature of what it is, releasing equity from a property will be more relevant to certain demographics and types of people over others. However, that is not to say that anyone else is not suitable for this financial product. Lenders and those offering equity release will be able to assess applicants on a case by case basis.
As a rule of thumb though, those opting for equity release in the UK will need to be over the age of 50-55 and will be established homeowners, having likely owned their own property for a number of years.
When looking at a lifetime mortgage, as opposed to a home reversion mortgage which is very different, it can be useful to release equity for various reasons. First of all, to pay off any outstanding mortgage on your property and secondly use relatively low-cost finance to repay high-interest debt.
Even though UK base rates have been relatively low for some time now, the interest rate on overdrafts and credit cards is often well into double digits. Indeed, some personal loans, depending upon status, may also be relatively expensive compared to current mortgage rates.
So, in theory, it would make sense to at least use part of any surplus equity release to consider repaying part/all outstanding high-interest debt. Not only would this save you interest charges going forward but it would also remove monthly repayments for these debts.
This statistic illustrates the average house price for equity release plan customers in the United Kingdom (UK) from the second half of 2015 to the second half of 2019, by type of lifetime mortgage. Equity release plans are designed to allow homeowners to access some of the value of their property without the need to sell their house and move out. A lump sum equity release plan facilities a one-off payment, whilst a drawdown equity release plan enables a homeowner to receive an initial advance, alongside an agreed amount cash facility that can be used when required. It can be seen that the average house price for both lump sum and drawdown customers increased steadily during this period, reaching over 315 thousand British pounds in lump sum plans, and 358 thousand British pounds in the drawdown plans, as of the second half of 2019.
The equity release market, and in particular the lifetime mortgage market for over 50s, is now more popular and more competitive than ever before. Many of the so-called “baby boomers” are sitting on properties with huge capital gains which have traditionally been difficult to release. However, while equity release interest rates are still higher than traditional mortgage rates, they have certainly come down significantly in recent times.
Recent predictions from the ONS suggest that the older population in the UK will grow significantly in the short, medium and long-term. This will create more demand and competition for lifetime mortgages yet thereby putting further downward pressure on lifetime mortgage interest rates.
It will be interesting to see how quickly this area of the market grows because there is still a premium on interest rates charged against traditional mortgage rates.
When looking at equity release, whether lifetime mortgages or home reversion schemes, it is vital that you seek financial advice. A mortgage broker will be able to find the most competitive equity release terms in the market for your particular situation.
Also, it is important to take into account your broader financial picture as opposed to simply focusing on your property, mortgage arrangements and equity release. As we touched on above, simple actions such as repaying high-interest debt using low-interest equity release finance can save you a fortune going forward.
Generally speaking, and assuming the equity release in question is in the form of a lifetime mortgage rather than a home reversion-type arrangement, it will apply to people who:
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