You may have heard the term ‘equity release’ without really understanding the benefits and drawbacks of the concept. These schemes can be a smart and sensible way to release cash from your home. This can give you financial freedom as you get older.
“Most retirees find themselves equity rich but cash poor,” says equity release specialist John Whyte “with the interest amount fixed at very low rates for life, now is the best time to release the equity locked up inside your home; either as a lump sum or in small drawdown amounts”. But just because market conditions are favourable, it doesn’t necessarily mean that equity release is always the right option for you.
Let’s have a look at some of the reasons you might want to choose equity release in your situation, or why there could be a better idea out there.
The types of equity release
Equity release allows you to release money from the value of your home without having to sell it or pay back the amount during your lifetime. There are two main types of equity release schemes. The first is a lifetime mortgage in which you borrow money secured against the value of your home. As long as you have paid of existing mortgage, the loan is then yours to use as you wish. To take out a lifetime mortgage, you and your partner both need to be at least 55 years old.
The second form of equity release is called a home reversion scheme. You sell all or part of your home to a reversion business. You can then continue to live in your home, rent-free. In both schemes, the mortgage is fully repaid when you die or go into long-term care and the house is sold. To take out a home reversion, you and your partner both need to be at least 65 years old.
The advantages of equity release
Equity release can be hugely beneficial depending on your situation. One of the most valuable aspects of these schemes for many people is that they can get cash while still being able to live in their family home. It’s true that regardless of house price changes, you can never go into negative equity. So even if there was a crash in the housing market, your home would be worth the same amount to you as when you signed up to the scheme.
Equity release can also be very flexible. For example, you can choose either to get the equity as a lump sum or get paid a regular income over a period of time. Generally there is no restriction on what you can use the equity for. You might wish to enjoy the holiday of a lifetime, pay for grandchildren’s education or fund improvements to the property.
The disadvantages of equity release
In terms of the home reversion scheme, you are unlikely to receive a true market value rate on your home as the company will have to wait many years to see any return on investment. With the lifetime mortgage you are likely to have interest rates that are higher than standard mortgages and this interest can add up to a very significant amount, especially if your lifetime mortgage stretches over many years.
Of course it is worth remembering that if you are releasing equity to fund your lifestyle, this will affect any inheritance that your children will receive. You should also be aware that equity release can impact the benefits that you may receive once you reach pension age.
There are plenty of alternative options to equity release that it can be worth you looking to. For example, if you simply want to take out a sum of money, it could be cheaper to do it through a standard unsecured personal loan. It could also be possible to get a mortgage extension, although it’s worth noting that few lenders will allow you to re-mortgage if you are over the age of 65.
You could also look into the option of downsizing. While downsizing can be stressful, it is likely to be the best way to get a substantial amount of money without the complexity of an equity release scheme.