Why You Need to Consider Alternatives to Equity Release
I think you’ll agree with me when I say…
Parting with your family home can be emotionally stressful, especially when you have dependents.
Well, it turns out that equity release is not the only solution to your financial constraints. There are ten alternatives you can opt to consider before making the difficult decision of taking out an equity release plan.
The 10 Alternatives to Equity Release
While it’s true, that many people use equity release schemes every year to fund everything from home improvement, opening up a small business, repaying debts owed, and round-the-world trips – it’s certainly not for everyone.
Having financial freedom is, something everyone wants, but in as much as equity release may look like your only way out, it’s always essential to weigh up the pros and cons before you raise money that way.
Equity release alternatives, the home reversions, and lifetime mortgages are far from perfect financial products.
They can be both costly, intransigent, and with that have certain pitfalls that one needs to consider other options before taking them out. Here are a few:
Take a moment and assess your property. Do you think you can you sell your current home and purchase a smaller property or an estate in a cheaper area?
Well, once your children are grown, and they leave the nest, you will have more space in your home than you need. That is when downsizing becomes a viable option.
It’s one of the more popular ways of freeing up some extra cash in the UK market right now. In fact, according to a report by a major insurance company, nearly two in five over-55s – up to 3.5 million homeowners – plan to sell their houses and expect to raise around an average of £88,000. Over 78% of the over-55 homeowners planning to sell say that the goal of downsizing is to release equity.
So, what are the conditions for downsizing?
- If your home feels like it’s too big for you
- If it’s an older property that requires constant maintenance
- If the estate is expensive to run
- If you want to move to a different region
However, in as much as it’s the right move for you to make, very few homeowners can finance their retirement solely by downsizing, and it also has some disadvantages such as:
- If perhaps, the property market is falling at the point when you decide to sell your estate, you might not be able to make as much money as you may have anticipated.
- Additionally, it can also take you months to find a buyer or a place to relocate.
- Downsizing also forces you to leave what your familiar and longstanding family home, a situation that might be stressful for some people and even their family members.
- There are also some cost-related considerations when down-sizing like: state agent’s fees1 , legal fees, moving costs, re-decorating, replacing furniture, and stamp duty.
2. Ask Your Friends and Family for Financial Help
Sit down and assess whether your family and friends can lend a hand. If they can, then do not shy away from asking for their much-needed help.
Some friends or family members can send some money your way, but you should also make sure that you’re both clear about whether you’re receiving the cash as a gift or a loan so that you can avoid any awkwardness down the road.
You can also choose the option of asking some of your family members to purchase the estate (or part of it) and then sign a long-term lease to continue living there.
- However, in as much as that sounds like the best deal, it’s not as straightforward and can lead to potential complications in the future. For example; if your son or daughter were to purchase the home, and is then declared bankrupt, you could be evicted since you’re only a tenant.
- Perhaps, if their marriages were to break down; the house could be disputed in any divorce hearings.
Some very complex tax circumstances might also arise, primarily if you sold the property for a discounted rate. In such a situation, the taxman and the relevant local authority could assume that you have successfully given a proportion of your estate away, and thus it would be considered part of the taxable estate at death.
Therefore, before you consider asking your family to buy your property, it’s vital that you take proper legal and tax advice from your lawyer or property manager.
3. Use Your Savings & Other Investments
Do you have any investments or a savings account in your local bank? If yes, are they sufficient to give you the lump sum or extra income you require?
If so, consider using these first, and postpone taking out an equity release. As much as you might be desperate for the cash, always make sure you keep aside an emergency fund for life’s essentials and for you to feel secure with adequate funds in the bank.
If you have any investments, it might be a great idea to seek professional help before doing anything. Some investments might be tax-free, as the ISA2 , or maybe you have some cash semi-locked up in specialised financial products.
If so, selling or accessing the money without proper planning, might mean you’re leaving cash on the table.
4. Take in Tenants
Are you comfortable living with strangers? Do you have an Airbnb account? If you answered yes then why not get down to registering the part of your home you want to lease out for a few months? You can even rent one of the rooms out to a foreign exchange student over the summer, and under the government’s Rent a Room Scheme you can easily earn up to £7,500 a year from a tenant before any tax is due on the proceeds.
Thus, it not only brings you in the much-needed extra money but also allows you to remain in the property, but also allows you to meet new people and learn about their cultures, which can be an exciting adventure in your retirement.
The downside to this alternative, however, is that your house may not feel like your own, and you might probably not be up for the hassle that could come with having a lodger.
5. Are You Claiming All the State Benefits You’re Entitled To?
Before you make an irreversible decision by taking out an equity release scheme3 , make sure that you check if you’re eligible for any state benefits that you might be entitled to. You might also want to consider visiting your local authority to see whether you can claim any means-tested benefits like pension or saving credit, disability benefits, or council tax reduction benefits. These benefits could increase your income or aid with home improvements.
6. How About Re-Mortgaging?
Can you borrow the money you require from another source, like say, a bank?
Well, even if you’re retired, you can still borrow against the value of your estate. You could either take out a loan against the value of your home; or re-mortgage your house either as part of a credit agreement or a typical residential mortgage.
Re-mortgaging is often overlooked by those considering freeing up some cash for their golden age adventures.
In as much as some mortgage providers do not love dealing with retirees, some accommodate the idea. All you have to do is call your local mortgage provider and see what’s possible.
It would be best if you came up with a dependable and contractual plan of payment, maybe like monthly repayments.
The advantage of re-mortgaging is that the interest rate is usually lower than that of an equity release deal and you’re offered far more flexibility. So if you want to withdraw the mortgage or refinance4 it in 2-3 years, the repayment penalties are usually reasonable. It’s also less disruptive than moving.
However, in as much as it’s the perfect deal, if you cannot keep up with the repayments, there is always a risk of your home being repossessed.
7. Reduce Your Expenditure
Most people take out equity release to maintain their standards of living – rather than as a way of producing funds needed just to get by.
So, if you’re struggling to live within your means in retirement, you could start by analysing your expenditure to see if there are any areas where you could cut back.
Making cutbacks in your day to day life like shopping around for cheaper utilities, reviewing house & car insurance or even shopping habits, can go a long way towards bridging the shortfall that exists and thus allowing you to keep your home.
8. Get a Part-Time Job
If you’re still up for some running around, you can always get a part-time job. You can opt to be an expert adviser in your field or work towards setting up that business you have always wanted to own. It’s a perfect way of keeping you active and healthy, getting a fresh perspective of things, and allowing you to fund your lifestyle.
9. Check Your Eligibility for Local Grants to Improve Your Property
Most local authorities offer grants to assist with the cost of home improvements. However, the amount you get and availability depends on the local body itself. So before you opt for equity release, do some research and find out what your local community can offer you.
10. Consider Other Equity Release Options
Depending on your disposable income and age, individual financial institutions can still offer you conventional personal loans, credit cards, or hire purchase. These might make you incur additional monthly expenses and because of age, may only be available for a short term.
So, if they are an option, make sure they will be affordable for the whole term and not just the present.
Most people often want the best of both worlds – to continue living in the current state while also having some more cash in their pocket for the best life and adventures. Sadly, for many, this isn’t possible, and thus they make some difficult choices, one of them being equity release, which may eventually lead to the loss of family property.
So instead of jumping to a conclusion and taking out an equity release, make sure that you make a prudent decision. Remember first to do everything possible to reduce or limit your debt burden.5
Yes, there are several alternatives to equity release. Some of the most common include downsizing, moving to a less costly estate, using your pension pot, or asking for help from your friends or relatives.
Learn More: Equity Release Alternative
There are several drawbacks to taking an equity release plan, and some of these include:
- It has rolled up interest
- It reduces the amount of inheritance you can leave for your family
- There are limits to the amount of capital you can release
- You miss out on the increasing estate market value
- It affects your entitlement to state-entitled benefits
- There are early repayment charges
Learn More: Pitfalls of Equity Release
Taking an equity release plan isn’t a bad idea. In fact, it can be the smartest financial decision you’ve ever made. It allows you to unlock tax-free cash that’s tied up in your estate, and you only have to repay the capital when you die or move into permanent care.
If you don’t have any heirs, it’s one of the best decisions you’ll make. However, if you have a family, then you need to consider ring-fencing a part of your estate before taking out the plan.
Learn More: Is It A Good Idea?
Well, this depends on what you need. Nonetheless, most people go for the lifetime mortgage plans. Lifetime mortgages work by enabling you to unlock the value of your property. The financial product also offers you several options that you can comfortably choose from, based on your needs. There are income lifetime mortgages, voluntary repayment options, and drawdown lifetime mortgages, among others.
You get to enjoy tax-free capital while also retaining ownership of your home.
Unlike other residential mortgages that work on fixed rates, lifetime mortgages run for life, and you continue to reside in your property with no rent until you die.
Learn More: What’s A Lifetime Mortgage?
How much money could you release?
An equity release allows you to access the value of your home, tax-free without having to sell up, so that you can have money to spend on whatever you want or need.