As people enter later life, they sometimes find that as much as they have tried to save up, plan and prepare, that they need additional income in order to do everything that they want to do.
Whether it’s for home renovations, luxury holidays or to just simply enjoy a more comfortable retirement, one solution could be to release some of the money or ‘equity’ tied up in their home, this is known as equity release.
How Does Equity Release Work?
Equity release provides homeowners with a large sum of money or smaller, regular amounts overtime to spend as they wish, whilst allowing them to continue to live in their home.
This works by using one of 2 types of equity release mortgage:
- Lifetime mortgage
The most popular choice for equity release, lifetime mortgages allow homeowners to borrow a lump sum which is repaid from the sale of the property after they move into long-term care or pass away. The amount that can be borrowed is usually between 18-50% of the homes total value and sometimes individuals can qualify for an enhanced lifetime mortgage if they suffer from certain listed health condition or lifestyle choices such as smoking, allowing them to borrow more or pay a lower interest rate.
- Home reversion
Home reversion schemes involve selling all or part of the property, whilst retaining the legal right to continue living there until the persons passes away or moves into long term care. The money released can be paid as one large lump sum or as smaller payments like a regular income.
Typically, the older the person is who is taking out this scheme the more money they will get but their state of health is also taken into account and those with poor health can be offered a larger share of their homes value.
What Are the Pros and Cons of Equity Release?
Equity release can be a great solution for some homeowners but as with all things it can carry risks and so suitability will depend on the individual circumstances of the borrower.
Here are some of the pros and cons of equity release:
Pros
- Homeowners can release equity from their home in the form of either a tax-free cash lump sum, as ongoing smaller payments or as a series of flexible payments.
- Lifetime mortgages allow you to release equity whilst still retaining full ownership of your home for life, until you die or go into long term care.
- Most equity release plans work in a way that means you don’t need to pay anything back until your property is sold after you longer need it.
- Some lifetime mortgages can come with a ‘no negative equity guarantee’ which helps to ensure that you will never owe more than the sale value of the property.
- You don’t have to make any repayments but if you prefer to then there are options which allow you to make payments against the interest and the loan.
- With a lifetime mortgage you not only retain ownership but can also benefit from any future increases in the value of your property.
- If you want to then you can choose to pay off the loan early.
- Although equity release can reduce the value of your estate, this can be useful in helping to reduce your inheritance tax liability.
Cons
- As with all mortgages there can be charges for equity release such as lender fees, solicitor fees and equity release adviser fees, the total for which can total around £2,000 – £3,000.
- With a lifetime mortgage, the money released from your home can have an effect on any means-tested state benefits that you are entitled to.
- If for whatever reason you choose to repay part or all of the loan early, then you may need to pay an early repayment charge.
- On a lifetime mortgage, although the interest rates are generally quite low, they can ‘roll-up’ over time, adding to the overall debt which means that by the end of the plan the total you owe might be the whole value of your home.
- If you opt for a home reversion plan then you will lose out on most or all of the additional money that comes from any rise in the property’s value.
Professional Equity Release Advice
If you are looking at opportunities for additional sources of income, then equity release could be the ideal solution. However, this is a big financial decision that should only be made after seeking advice from professional, independent equity release advisers who will be able to assess your individual circumstances and answer any questions you may have to help you reach the right decision.
Please do not hesitate to get in touch with us at Bower and one of our friendly, knowledgeable experts will be happy to help.
