Homes are our sanctuary, and for many homeowners, their most significant asset. It’s perhaps for this reason that almost 40,000 UK homeowners use their estates to boost their finances each year.
Equity release plans are, for instance, the most sorted out financial schemes, for those who are 55+ years, UK residents and homeowners of an estate worth more than £70,000. By using an equity release plan, you can fund your home gentrification projects, help your kids financially, and improve your lifestyle.
Are You Considering Equity Release?
Nonetheless, these plans aren’t for everyone, and it’s vital to weigh up the pros and cons of equity release before you raise cash in that way. To help you make an informed decision, here are some of the perks and pitfalls of equity release:
Equity Release Pros
Here are some advantages of equity release financing:
#1. You Get Tax-Free Cash
With these plans, you get tax-free cash that you can spend as you wish. You can choose to:
- Pay off your mortgage and clear existing debts
- Work on home gentrification projects
- Boost your income and improve your lifestyle
- Help your family
- Go on your dream vacation
You also get to choose whether to take your cash as a lump sum or as drawdowns.
#2. You Get to Stay in Your Home
Unlike conventional mortgages, equity release allows you to remain in your home till you die or move into permanent care. It’s a perfect alternative to downsizing.
#3. You Don’t Make Any Monthly Repayments
You don’t have to repay the cash until you die or move into residential care, after which your plan provider will put up the house for sale and pocket the percentage of the money you took and give the remaining proceeds to your heirs.
It means that your monthly outgoing won’t go up, and you’ll know where you stand. However, some people prefer to reduce their debt and go for the early repayment option.
#4. You Don’t Owe More Than the Value of Your Home
Thanks to the Equity Release Council, lenders now have to include the ‘no negative guarantee’ in their equity release plans. This scheme allows you to enjoy your money knowing that the amount you pay back won’t go up because of house price increments.
Thus, even if your estate’s value drops, your dependants won’t have to repay any more than the value of your home. You can read all about this by checking out ‘Is Equity Release Safe?’ article.
#5. You Get Access to Low-Interest Rates
Interest rates on equity release have been at a constant low in the last five years. According to recent research, by Defaqto, the market average equity release interest rate for homeowners aged 65 and above is 4.55% (as of January 2020).
#6. You Can Avoid Paying Inheritance Tax
The plans also offer you a way out of inheritance tax. You can give your family their inheritance in the form of a cash gift and avoid all the tax procedures.
Nonetheless, inheritance tax rules are complicated, so before gifting your family, ensure that you consult a financial expert.
#7. Equity Release Offers You Flexibility
Equity release plans are also very flexible. First, you get to spend tax-free cash however you want. Second, you get to choose how to release the money. You can opt to release via the drawdown scheme, one lump sum, or as a combination of both. You can also reduce your interest in the long-term by releasing less money, less often, or if your income enables you can make frequent or one-off capital reimbursements.
#8. It Helps in Reducing Your Debt
The lifetime mortgages and home reversion plans also allow you to reduce your debt. In 2019 alone, over 80% of equity release plans included the voluntary, penalty-free, ad hoc payment plans, meaning you could opt to lower your debt by making some early repayments yearly, or when you can.
#9. Equity Release Plans are Regulated
The Equity Release Council and Financial Conduct Authority regulate equity release plans so you can breathe a sigh of relief knowing that you’ll get the right product.
Equity Release Cons
Like any other product, equity release has some cons, and here are some but a few:
#1. Your Debt Increases Through Interest Rates
The longer you release cash through the equity release scheme, the more interest you pay in the long run. In rare cases, this can mean that you or your family can owe the lender the entire value of your estate.
With the ERC monitoring equity release products, though, your lender should offer a “no negative equity guarantee,” meaning you can’t owe more than the value of your property.
You need to, however, do your research as some plans allow you to pay off the interest monthly.
#2. It Can Affect Your Means-Tested Benefits
Equity release plans can also affect your entitlement to means-tested state benefits – like pension credit, savings credit, and council tax benefits.
Even if you’re not eligible for these benefits at the moment, you need to think carefully about whether you will require them in the future.
#3. You Can Pay Hefty Early Repayment Charges
Lifetime mortgages are a lifelong commitment. However, when you take an early repayment plan, you can be subjected to paying hefty early repayment fees.
That said, most of the newly released plans come with fixed-term early-repayment charges, so a few years in, you can always close it.
#4. You Can’t Leave Your Home as Inheritance
Since equity release schemes reduce the value of your home, you’ll leave a reduced inheritance to your family. So, before taking a plan out, make sure you sit down with your loved ones and explain this to avoid future problems.
Moreover, with the guaranteed inheritance scheme, it’s possible to protect your property. So, ensure you consult your financial adviser about this option.
#5. You Pay Set-Up Fees
Taking out an equity release plan means you have to incur set-up fee like:
Application fees – these include the financial adviser’s fees, lender’s costs, property appraisal fees, and the solicitor’s fees. They also vary from between £2,000 and £3,500.
#6. You Can’t Take another Loan Against the Value of Your House
When you take out a plan, you can’t take any other loan using your home as collateral.
#7. You Miss Out on House Price Rises
If you take the home reversion plan, you’ll sell a proportion of your home to the plan provider, meaning that you can’t enjoy house price rises.
It enables property owners to access the equity of their residence without having to sell it, move or downsize to smaller residence.
The value can be unlocked either as a one or in a series of remunerations (drawdowns), with the understanding that it will be repaid at a later date.
It involves accessing funds against the value of your residence, (with home reversion schemes – selling all, or segment of your property) and may work out to be way more pricey in the long run than downsizing to a smaller one.
It may also alter your entitlement to state privileges and grants.
Equity Release involves acquiring equity tied up in your property against the value of your home.
With lifetime mortgages, you get ‘rolled up’ interests at the end of the plan. Home reversion schemes involve selling a part of your home to the equity release provider.
Yes. The Financial Conduct Authority regulates it, and the Equity Release Council insists that its members adhere to a strict code of conduct designed to safeguard consumers.
If you don’t have any heirs, and are cash strapped, it can be your financial knight.
It allows you to fund everything from home improvements, opening up your dream business, repaying the debts owed, all-round-the world trips and the financial freedom to spend it as you see fit.
However, it also has drawbacks since it reduces the value of your securities, meaning a reduced provision for your heirs. So, before you take a plan out, you need to consider other alternatives like remortgaging, taking in tenants, claiming your state-entitled benefits or checking your eligibility for local grants to help you improve your property.
Perhaps your current plan provider has denied lending you extra money or the terms it’s giving you aren’t worthwhile.
Re-mortgaging to a new income-provider might allow you to raise cash cheaply on low rates. The most commonly tolerable reasons to raise capital are for home renovations and paying off other debts.
Equity release is not always a bad idea.
When used incorrectly it can be a terrible decision, however, it can also be one of the smartest decisions you’ll ever made if you are looking to unlock cash tied up in your estate, without worrying about repayments.
Make sure you understand the pros & cons to see if it’s suitable for your circumstances.
Yes, there are, and you should consider the before you commit to taking out equity from the value of your home.
For more information, check out ‘Equity Release Alternatives’ and see which option suits your situation better.
Equity release is an incredible financial option. However, it has some cons which require careful consideration.
Yes, it’s worth considering. It allows you to unlock the value of your estate by turning it into a cash lump sum or monthly income.
It also allows you to:
- Enjoy financial freedom as you use the money as you wish
- Maintain your independence and the right to remain in your family home
- Enjoy the benefit of having a warranty.
It can be the warranted rates for life on the lifetime mortgage scheme or the no negative equity guarantee that ensures that any equity release scheme is adhering to Safe Home Income Plan (SHIP) regulations.
There’s a lot to consider with equity release schemes; therefore, make sure you pay a visit to your financial adviser before taking a plan out.
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