Our home is our sanctuary, our haven of safety, and, for many, our biggest asset. It’s perhaps for this reason that last year nearly 39,000 UK homeowners used their property to boost their finances*.
By using equity release plans, (the most common of which are known as lifetime mortgages), older homeowners are able to fund home improvements, help their children out financially or improve their lifestyles by accessing the money they have tied up in their property.
However, lifetime mortgages are not for everyone, and it is essential that you weigh up the pros and cons of equity release before you raise money in this way.
To help you make an informed decision, we have outlined what equity release is, how it works, and what the pros and cons are.
What is equity release?
If you are a homeowner over the age of 55, equity release can be used as a means of accessing the cash locked up in the value of your home.
The process involved is very much like taking out a mortgage, but it is typically much quicker as there are no credit or affordability checks involved. Usually it only takes 4-6 weeks from application to your money, (which by the way is tax-free) being in your bank account.
Equity release schemes are available in two types: lifetime mortgages or home reversion plans.
This option is the most common equity release scheme. In this scenario, the property remains 100 per cent in your name, giving you the freedom to live there for the rest of your life. Unlike traditional mortgages, there are typically no month-to-month repayments to make but most plans now have the facility to make voluntary repayments to help control the balance, if needed. Ultimately, a lifetime mortgage is usually repaid either upon the death of the remaining homeowner, or if they move into long-term care.
Home reversion plan
A home reversion plan, on the other hand, allows you to sell a percentage of the value of your property in return for a tax-free cash lump sum, or series of capital amounts. In this scenario, the home reversion provider offers a lifetime tenancy to the homeowners, enabling them to live rent-free in their home for the rest of their lives.
Advantages of equity release
Whether you plan on using your money on a holiday of a lifetime, home improvements, or to boost your pension pot, equity release offers a simple and convenient means of paying for life’s most important events. You can also choose whether to take your money as a lump sum or in several smaller chunks (known as drawdown).
Similarly, many homeowners use equity release to bestow their loved ones with a form of ‘inheritance’ while they're still here; this is often used for important life events, such as helping children with the deposit for their first home or to pay for a wedding.
No need to downsize
Leaving a home you’ve built memories in over many years can often be distressing. Thankfully, one of the biggest benefits of taking money out of your home via an equity release scheme is that there is no need to move and downsize. Equity release means you can stay in your home and needn’t experience the stress and inconvenience of a new environment.
One of the most popular reasons people choose an equity release scheme is because they are so flexible. Indeed, if you are to take out a lifetime mortgage, you won’t be told what you can and can’t spend your tax-free money on – it’s completely up to you. It’s also possible to release your money as and when you need it via a drawdown scheme, rather than in one lump sum. Moreover, you can reduce the amount of interest accrued in the long term by releasing less equity, less frequently or, if your income allows, you can make regular or one-off capital repayments.
No negative equity guarantee
At Equity Release Supermarket, we are long-standing members of the Equity Release Council (the industry’s governing body), which means that all the equity release schemes we advise on come with no negative equity guarantees. This means that the amount you pay back isn’t driven by house price changes.
Therefore, even if your house value drops in the future, your dependents will not be obliged to repay any more than the value of your house at that time, and so won’t be left with a bill to pay.
"The equity release market has changed beyond recognition over the last few years”, commented Mark Gregory, founder of Equity Release Supermarket.
“Last year alone, the number of plans to choose from increased by 25 per cent. The great news for our customers is that we can find a plan tailored to meet their needs, regardless of their circumstances.”
Disadvantages of equity release
‘Roll up’ interest
Lifetime mortgages allow homeowners to borrow money against the value of their property at a fixed rate of interest. Because many people choose not to make any interest repayments over the life of their plan, this means that the interest is ‘rolled up’ and added to the final repayment when the plan ends. The longer the term of the plan, the greater the amount of interest that will have to be repaid.
As previously mentioned, the amount of interest to be repaid can be kept to a minimum by either withdrawing equity in smaller chunks over time (what’s known as drawdown) or by making regular or one-off capital repayments: or both!
With Equity Release Supermarket, you can be sure that your local adviser will make sure that you are aware of all the potential pitfalls of equity release. If it isn’t right for you and you have other financial options to achieve your goals, we’ll tell you so.
Early repayments charges
Lifetime mortgages are so-called for one very good reason – they are not designed to be repaid during your lifetime.
Consequently, plans can potentially have hefty early repayment charges if you want to repay it early. That said, many of the new breeds of plans come with fixed-term early repayment charges, which means that a few years in, you have the option to close it.
Because equity release reduces the value of your estate, it will mean a reduced inheritance for loved ones. That said, it is possible to safeguard a proportion of your property with a guaranteed inheritance plan. If this is important to you, make sure you talk it through with your Equity Release Supermarket adviser.
Whenever you’re ready to talk about the pros and cons of equity release, our experts are happy to help.
Is equity release safe?
One of the biggest common misconceptions surrounding equity release is that the sector is unregulated – but this just isn’t true. There are a number of protections in place to ensure the safety of equity release plans. All our advisers feature on the list of qualified professionals provided by the Equity Release Council, who, in turn, heavily regulate our sector.
You can also be assured that lenders only accept an equity release application following advice from an authorised and qualified equity release adviser. Our advisers provide quality advice from the whole of the market, with no pressure. This allows you to make a decision in your own time, either in the comfort of your own home, or over the telephone.
The Financial Conduct Authority, the financial services watchdog, ensures that an equity release plan can only be advised upon by a specially trained financial adviser and there are many checks and balances during the process to ensure that plans cannot be mis-sold. One of these is that a solicitor must be instructed to ensure that all the customer’s paperwork is in order and that they fully understand the implications of taking out an equity release plan.
“At Equity Release Supermarket, I hand pick my advisers myself to ensure that they offer our customers outstanding advice. As an ex-adviser myself, I understand just how important this is,” said Mark Gregory.
To discuss the pros and cons of equity release schemes, please contact the Equity Release Supermarket team on Freephone 0800 802 1051 or email [email protected].
*source: Equity Release Council, Spring Market Report, March 2018.