Equity release often appears to be a way to quickly help home owners over the age of 55 unlock the value tied up in their property, while remaining in their own homes. You can benefit from a cash lump sum for your property or regular payments. There are a variety of different equity release schemes available from a range of providers.
Making any decision to use equity release schemes to profit from the cash tied up in your home can be hard. You need to check out all the pros and cons of equity release schemes beforehand. Looking at other available options before making any hasty decision is also wise. Any equity release advisers you meet should be registered with the Equity Release Council or authorised and regulated by the Financial Conduct Authority. In the year 2010, around £910.6 million of equity was released in the UK by homeowners and this had risen to £1.38 billion by 2014.
Check out the summaries below for an overview of some of the advantages and disadvantages of equity release schemes. You will also find information on some of the available alternative options.
Advantages of Equity Release
Equity release schemes give you a lump sum now and allow you to remain in your own home until you die or move into long term care. You can choose the type of equity release scheme you need, whether it’s a lifetime mortgage or a home reversion plan and will benefit from a tax free cash windfall when you most need it. Most equity release schemes allow you to release up to 60% of the value of your property, although this does depend on your age, whether you suffer from ongoing medical conditions and the property valuation.
Home reversion plans are regulated by the Financial Conduct Authority and involve selling all or part of your property to a regulated provider in return for a cash sum or scheduled payments. You can stay in your property until you die, and have to agree to regularly maintain your home and continue insuring it. You can retain a share of your home for inheritance purposes and this retained portion remains the same irrespective of changes in property valuations. When the plan ends, your property will be sold and the proceeds shared out according to the proportions of ownership. Home reversion plans are authorised and regulated by the Financial Conduct Authority.
Lifetime mortgages tend to be the most popular model for releasing home equity and most prominent providers will be a member of the Equity Release Council. A lifetime mortgage is a mortgage secured on your main residence which enables you to retain ownership. You can opt to ring-fence a proportion of the value of your home for inheritance purposes and some schemes allow you to make mortgage repayments, although most will allow the interest to roll-up.
No Negative Equity Guarantee
With a lifetime mortgage, the total loan amount and accrued interest are paid at the time of your death or if you should need to move into long term care. The available percentage of cash windfall generally increases with age on lifetime mortgage schemes and some schemes will also offer larger sums to applicants with certain types of medical conditions. In general, interest rates will be fixed or “capped” for the lifetime of the loan and a “no negative equity guarantee” will be in place.
With no negative equity guarantees you can be assured that when your home is sold and all the sales liabilities are met, there will be no liability on you or your estate to repay any outstanding lifetime mortgage amounts which take your account into a status of negative equity. This is important as rolling up interest repayments on a lifetime mortgage can result in hefty accrued balances by the end of term. Lifetime mortgages also offer rights to move to another acceptable property, if you should choose to move home, and the new property will be used as continuing security for your lifetime mortgage loan.
Equity release is one way to ensure you can still retain the use of your home, while profiting now from its accrued capital value, by way of a lump sum payment or a steady income stream. It is particularly useful for anybody who has no intentions, or ability, to leave a large estate when they die.
In summary, the principal benefits of equity release are:
– that it can provide a tax free cash lump sum or stream of regular income for the remainder of your life and reduce the amount of equity tied up in your home
– it can reduce liabilities for inheritance tax when you die
– lifetime mortgages provide the ability for you to remain in your home until you die without the requirement to make repayments
Disadvantages of Equity Release
The principal disadvantage of an equity release scheme is that it can prove far more expensive when it’s compared to ordinary mortgages. You will also need to factor in the cost of arrangement fees for putting any equity release plan in place. Lifetime mortgages entail higher rates of interest than those charged by traditional mortgage providers and the outstanding debt can grow very quickly when interest is rolled up. Of course, house price increases can mitigate this factor, to some extent.
When it comes to home reversion plans, it’s highly likely that the value assigned to your home will be a good deal lower than the property’s open market valuation. This reduces the value of your estate and the percentage of your home owned by the home reversion provider remains the same, irrespective of property price increases over the period.
Equity Release on a Mortgaged Property
Negotiating equity release plans can be difficult if there is an existing mortgage in place or if there is any loan secured on the value of your property.
Releasing the equity tied up in your home also means you have less capital to fall back on at a later date. And, once you have spent the money you release from your home, it’s impossible to get back. You cannot foresee all likely problems and circumstances that could arise during your retirement years, so profiting from cash tied up in your home at an early age could be a risky move. Although it’s possible to move to a different property and still continue with your lifetime mortgage arrangement, any future plans to downsize your home will be affected as you may not possess enough equity to do so and could be required to make mortgage payments. Furthermore, your entitlement to UK state benefits could be affected if you receive ongoing payments from a home reversion plan.
In summary, some of the principal disadvantages of equity release plans include:
– interest charges on lifetime mortgages can mount up quickly when interest roll-up plans are in place
– these schemes can be expensive and complex to unravel if you change your mind
– equity release schemes are likely to reduce the amount of equity in your home and will decrease the value of any inheritance you leave to your heirs
– profiting from equity release schemes can impact entitlement to means-tested benefits
Alternatives to Equity Release
If you need to raise cash in a hurry or increase your income later in life, there are alternatives to equity release you could consider. You might want to think about taking in lodgers by renting a room or rooms in your home. This can be a useful option if you wish to remain in your own home and have available space. Current legislation allows you to earn up to £7,500 each year on lodger income, without any income tax complications.
Alternatively, if you need to realise the cash value locked into your home in a hurry, you can easily sell your home within a week when you use the services of property cash buying agencies such as ourselves. This allows you to benefit from an immediate cash injection and downsize to a more convenient property in your own leisure.
UK Property Cash Buyers provide safe and guaranteed home sales from cash buyers, offering a trouble-free service that does not include any hidden fees. Our buyers will provide you with a free, immediate cash offer for your home, allowing you to progress your future plans with ease and the money you release from your home will be with you within seven days.