A Wise Retirement
I think you’ll agree with me when I say…
There’s no financial product that is 100% perfect, and even though equity release saves you from financial stress, it does have its cons.
Well, after more than ten expert consultations and hundreds of consumer reviews, here is a comprehensive guide on the drawbacks to taking out an equity release plan.
Why Equity Release Might Not Be Your Best Financial Decision
Since evolution, homes have been most people’s haven of safety, serenity and for many, in recent times, their most significant asset. It’s probably for this reason that almost 40,000, over 55+ homeowners in the UK, have been using their estates to boost their finances by taking out equity release schemes.
So, if you’ve paid off all, or 60% of your mortgage, an equity release plan provider can guide in releasing some of the equity in your home, without you having to move out. That means you could get your hands on some extra capital to top up your pension, work on that fantastic conservatory you have been planning on, go on the vacation of your dreams with your partner or give a living inheritance to your kin.
However, in as much as equity release is one of the best financial products, it’s not for everyone, and therefore vital that you carefully weigh up the pitfalls and benefits of equity release before you raise cash this way.
To aid you in making an informed decision, here are some of the reasons and issues why equity release can be a bad idea for you:
1. There is ’Rolled Up’ Interest
With lifetime mortgages, one of the most common equity release plans, you get to borrow cash against the value of your estate at a fixed rate of interest.
Since most people prefer it to home reversion plans because you don’t have to make any monthly interest repayments over the life of this plan, the interest is ‘rolled up’ and added to the final compensation when your lifetime mortgage plan is due.
It also doesn’t help that the longer the term of your plan, the more the amount of interest will be repaid after you die or move into long-term care.
You can, however, choose to keep the amount of interest to be repaid to a minimum by opting to either withdraw equity in smaller chunks over time (the drawdown lifetime mortgage plan) or by making consistent or one-off capital repayments (the lump sum lifetime mortgage plan), or both!
It all depends on your plan provider, and thus, you need to be sure that he/she explains the potential pitfalls to you.
2. You Get a Reduced Inheritance
Equity release lowers the value of your estate, meaning a reduced inheritance for your heirs.
That said, you shouldn’t start panicking. It’s possible for you to secure a portion of your estate with the current lifetime mortgage security option, ‘the inheritance protection guarantee.’
Some equity release providers like Aviva and More2life provide you with this safety feature. When you hand pick the percentage of the estate value you wish to safeguard; these schemes allow a fixed proportion of the property value to remain on the eventual sale of the property. Moreover, if you select a higher percentage of the inheritance protection guarantee, then you’re more likely to get a reduced maximum loan amount available from the inception of the plan.
If that’s what you need, then be sure to talk to your financial advisor and plan.
3. Limits to the Amount You Can Release
As of late 2018, the value of most homes increased by about 20%, especially with the increased population levels and economic inflations.
So, while you might currently have a substantial amount of equity in your estate, the amount you can release could be considerably less.
Most equity release scheme providers typically have to wait decades before they are repaid, and as a result, the “discounts” that apply to the amount available can be shocking.
Moreover, the younger or healthier you are when you sign up, the less equity available to unlock.
4. You Miss Out on Increasing Property Market Values
Another type of equity release plan, the home reversion plan, comprises of you selling all or a proportion of your home to a plan provider, in return for a cash lump sum and the right to remain living there. It’s shared ownership.
When your provider decides to sell the property, however, they tend to get a share of the proceeds.
What this means is that you and your loved ones will not benefit from the full upsurge in value. For example, if you were to probably sell a 50% stake in your estate to an equity release provider, you would only see 50% of any future house-price upturns.
5. There Are Early Repayment Charges
Lifetime mortgages, as their name precedes them, are not designed to be repaid during your lifetime.
Subsequently, these plans can potentially have substantial early repayment charges if you want to repay them before you die or move into permanent care.
That said, however, most of the new plans come with fixed-term early repayment charges, which means that with a few years in, you have the option to close it.
6. Your Benefits Are Affected
By releasing the equity from your property, you automatically increase your income or savings. However, this might have adverse effects and affect your claim to your means-tested benefits.
7. You May Have Fees to Pay
If you need additional capital to cater to your needs in retirement, equity release might be an appealing option. However, it’s worth considering other alternatives given the fact that interest charges can sky-rocket or you might have to give up some tenure. You can opt to either downsize to a smaller home or try borrowing some money from your trusted friends or family members. You can get more information on these options by checking out ‘Alternatives to Equity Release’ guide.
You might also want to consider getting impartial specialist advice about whether equity release is suitable for you, and if it is, which plan perfectly suits you. For this and more information, you can click here to see how much equity you can release and chat with an expert for free.
With various equity release schemes, you may have to pay some extra fees like the initial fees, which include: financial advice fees, solicitor’s fees, and lenders fees, together with property valuation fees. The amount you pay, however, is dependent on your choice of company.
How much money could you release?
An equity release plan 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.