Equity Release Explained
As house prices have risen over the years and pensioners find their income stretching to meet the cost of upkeep of their home as well as their lifestyle, many are turning to a new process called equity release to boost their budgets.
Equity release allows a homeowner of late middle age or into their pension years to borrow money – be it in one lump sum or a regular payment – against the value of their home. For anyone in their golden years who wishes to supplement their income, help their children and grandchildren get a head start in life or simply add some luxury to their own lives, equity release is a popular option. According to the Express, more than 20,000 people applied for an equity release scheme last year in order to gain access to funds tied up in the homes they owned.
The main advantage of equity release is that borrowers can remain in their homes without selling up or downsizing.
Types of equity release
The two types of equity release are Lifetime Mortgages and Home Reversion Plans. Both have their similarities and differences but the main crux of the plans is:
– You exchange a cut of the value of your home for money
– You continue to live in your home
As equity release is a form of a loan, repayments will be due, however this normally takes the form of an interest-only repayment as the sum borrowed is still a part of your home.
The balance of the equity loan is paid through the sale of the house. This would happen when you and your co-owner have either passed on or are taken into permanent residential care.
The risks of equity release
Equity release is not necessarily a suitable option for everyone. If you’re not sure how long you will remain in your current home, for example if you may have to move into residential care, then equity release may not be suitable, as most schemes contain a clause which says the money must be repaid in full once the house is no longer occupied by the undersigned.
It also has an effect on what you’ll leave behind for your family once you’ve passed on. If part of the value of your home belongs to the equity release lender, this will reduce the amount of your total estate which is to be distributed according to your Will, and may also force the sale of your home in order to pay back the outstanding balance. Saga Legal offers comprehensive information on the risk involved in equity release plans, for example it’s not a suitable option for short-term borrowing as it is a long term commitment. Their website also highlights that there are fees involved but it varies based on the plan you take and the process could take up to 3-4 months for you to receive your money.
Great news for those concerned about Inheritance Tax, because the plan reduces the value of your estate, so this may reduce any Inheritance Tax liability you have.
Fortunately though, most lenders provide a guarantee that you’ll never owe more than the value of the portion you traded at the time of repayment, even if the loan on your home goes into negative equity.
Alternatives to Equity release – still gaining short-term cash
Equity release is typically used when there’s a need for some extra cash in the short-term. So we thought, what other options exist to help fill a short-term cash need?
- Rent-out your home.
If your property resides in a ‘great schools area’, and you don’t need such a big house anymore (e.g. grandparents), why not look to rent out your property?
If you rent-out for £x, and rent-in for £y (smaller property / less in-demand area) – then you can turn a great monthly profit, and you don’t have to sell your house!
Lot’s of keen young parents use this method to register their kids in the best primary or secondary schools (without taking huge new mortgage). It can definitely be a win-win! Speak to a good local estate or rental agent. That’s what they’re paid for.
- Sell your home.
Selling your home might actually be a better solution than equity release.
Since 2006, the UK property market has fluctuated dramatically, and stability is the ‘new black’. But some postcodes continue to enjoy above market growth, especially if in top school areas, and your postcode might be one of them?
If so, consider finding a great local estate-agent to sell your home £high, and buy you a new home £low (smaller / less in-demand area). You’ll gain the short-term cash boost required, and your estate agent gets fee’s at both ends too! Everyone’s a winner.
There are lots of options available to help short-term cash needs. It pays to think about all of them, before simply opting for equity release.