Equity release can be a good idea for older people who would like to gain some extra cash in retirement. It can help you make home improvements, pay for the costs of care, help a loved one who is struggling financially, or pay off other debt.
Without this vital information, equity release could end up being a nightmare for you and your family!
Luckily, we’ve got the latest inside scoop on whether or not equity release is a good retirement product in Dec 2021.
We’re here to help you discover:
- Is equity release is a good or bad idea to fund your retirement in Dec 2021?
- What are the pitfalls of equity release?
- What are the pros & cons of equity release?
- Is equity release safe?
- What’s the catch with equity release?
- Is an equity release mortgage worth considering?
We’ve delved into the topic, reviewed over 690 plans, discovered the pros and cons, and looked at why in the UK today, a retiree takes out an equity release product every 12 minutes.
Perhaps you’re next? Let’s find out now!
What’s Equity Release & How Does It Work?
Equity release is a set of financial products designed for retirees that allow a homeowner over the age of 55 to unlock the cash tied into their property, while still being able to live there.
Learn More: What’s Equity Release?
When Can I Use Equity Release?
The minimum age for taking out a lifetime mortgage is usually 55. The minimum age for a home reversion scheme may be 60 or 65. You will also need to own property.
What are the Equity Release Benefits?
The main benefit of equity release is that it gives you money to spend now, rather than leaving it locked away in your home.
Here are the main pros of equity release:
- Tax-Free – equity release is that it’s seen as a loan and not income, therefore making the funds released tax-free.
- Convenient – equity release is a straightforward way to access large amounts of money if you’re over 55.
- Right to Remain in Your Home – you (and your partner) are entitled to remain living on your property as long as you want to, until you pass away or move into a permanent care facility.
- No Negative Equity – your family will not pay more than the sale value of your home when the plan ends.
- You Own Your Home – you continue to have full ownership of your home and live there.
- No Monthly Repayments – the loan, plus interest, is paid back through the sale of your house.
- Inheritance Protection – certain equity release providers allow you to set a certain percentage of the house that is guaranteed to be passed onto your family.
- Flexible Compared to Traditional Mortgages – most equity release schemes don’t require you to make any repayments, and, as such, you cannot get into arrears, default, or have your property repossessed for non-payment.
- Competitive Equity Release Interest Rates – release cash tied up into your home without worrying about excessive rolling interest.
- You Can Still Move Home – you can move in the future as long as your equity release providers approves the property.
- Benefit From Increasing House Prices – the value of your property will grow as house prices increase.
- Flexibility – you can release money as and when you like with a ‘drawdown’ facility.
What are the Pitfalls of Equity Release?
The main equity release pitfall or con, is that you might end up spending money for nothing. However, there are other pitfalls you need to know!
Equity release can be a costly mistake, and this might be your reality if you aren’t aware of the equity release loan pitfalls & risks below!
- Pitfall #1. Spending Money for Nothing – taking out more cash than you need and paying interest on this amount.
- Lifetime Mortgage Compound Interest ‘Catch’ – with a lifetime mortgage, it will usually be up to your family to use proceeds from the sale of your home to pay back the loan plus rolling interest.
- Pitfall #2. Releasing Equity When You Are Younger – If you borrow when you are younger, your plan will likely last longer, increasing the amount of compound interest.
- Pitfall #3. Early Repayment Charges – if you cancel your plan before you die or move into permanent care, you may have to cover early repayment charges.
- Pitfall #4. Setup & Forget Catch – a lifetime mortgage can sometimes be a “setup and forget” situation, causing you to overpay with time.
- Pitfall #5. Missing Out on Increasing Property Values – a home reversion scheme involves you selling all or a portion of your home to a provider, so you won’t get the full growth in property value.
- Pitfall #6. Lower State Benefits – equity release will provide you with cash which might harm your eligibility for means-tested benefits.
- Pitfall #7. Reduced Inheritance – equity release is a loan secured against the property which means a reduced provision for your heirs.
What’s the Catch With Equity Release?
The “equity release catch” is that the money released will need to be repaid when you pass away or move into long-term care.
Is Equity Release Safe?
Equity release products are safe as they’re regulated by the Financial Conduct Authority (FCA) and governed by the Equity Release Council (ERC).
Here are 2 of the many reasons why equity release is considered safer now than in the past and why it could be the best decision you make this year.
- The Financial Conduct Authority (FCA) – The FCA¹ is the official financial product watchdog, overseer, and regulator in the UK. The trade agency oversees the lenders, brokers, and financial advisers who deal with financial products, including equity release service providers.
- The Equity Release Council (ERC) – The ERC² is the equity release governing body, and thus it insists that its members heed to a strict code of conduct designed to safeguard consumers.
TOP TIP: You MUST use a lender that is a member of the Equity Release Council.
Is Equity Release Worth It?
Equity release is worth it, if you’re over 55, own property and require tax-free cash to spend how you want. However, you need to note that with compound interest, you’ll end up paying a lot more for your loan than the amount of cash you receive.
Although you can only unlock somewhere around 35% of your property’s value, you could find yourself in a position where your entire home’s value is used to pay off the loan.
Learn More: How Much Equity Can I Release?
Tips for Choosing an Equity Release Scheme
- Consider all the alternatives first.
- Only borrow the money you need or choose a drawdown scheme.
- Compare the whole of the market.
- Consider inheritance protection or interest repayment options.
- Get expert advice from a qualified & independent equity release adviser.
- Check your early repayment options.
Be sure to start the process by speaking to an independent financial adviser, and use a provider that is a member of the Equity Release Council.
Learn More: Best Equity Release Companies
Got Questions? Check These Out First
Despite the Pitfalls, Why's Equity Release Popular?
Despite the pitfalls, equity release is popular because it has fantastic benefits. The industry is regulated by the equity release council and interest rates are reasonably low.
Am I Protected When Using Equity Release?
You are protected with equity release as long as you opt for a lender that is a member of the Equity Release Council.
What Are the Advantages of Equity Release?
The advantages of equity release include getting tax-free cash, having the opportunity to stay in your home, not having to pay back the loan during your lifetime, and low interest rates.
What Are the Disadvantages of Equity Release?
The equity release disadvantages include the costs involved, making it more difficult to remortgage your home, decreasing your inheritance, and the fact that your access to state benefits could be impacted.
What Are the Problems With Equity Release?
While equity release isn’t problem-free, it is a regulated industry. However, you aren’t going to get the most out of the value of your estate. You’ll be paying large compound interest rates, in exchange for only 25% to 63% of the value of your estate.
What Does It Cost to Set up Equity Release?
There are various up-front costs involved in setting up an equity release scheme, these costs can include:
- Valuation fees
- Legal fees
- Financial advice fees
- A mortgage arrangement fee
- A completion fee (when the scheme ends)
The costs of equity release can vary, but you should allow for around £3,000.
There is nothing more stressful than having financial concerns. The last thing you want for your retirement is to focus on juggling limited funds while covering household expenses.
Equity release is a fantastic way for you to have enough cash during your retirement, and should you wish to, you can still take out a plan to leave your family inheritance.