Equity Release
Equity release is quite simply a way to unlock the value of your property and turn it into cash if you are aged 55 or over. There are a number of ways by which you can release the equity which is tied up in your home.
If you are aged 55 and over, Equity Release means you can access tax free cash (equity) which is locked up in your property without having to sell your property. Equity Release allows you to continue living in your home but you take out a loan from an equity release provider which is secured against your home.
Is Equity Release A Good Idea?
Equity Release is a bit like a mortgage except the lender is paid back when the property is sold which is usually when the owner passes away or if the owner sells the property to move into long term care accommodation. Equity Release is only currently available if you are aged 55 or above. Equity Release is something which our advisers here at Worldwide Financial Planning will advise you on as there is a lot for you to take into consideration, for example, how much can you borrow, how old are you, what is the value of your property and what is your state of health?
An option to consider also is re-mortgaging to release equity. There are a number of ways in which this can be done so your independent financial adviser here at Worldwide will go through those options. This option is different to Equity Release.
Re-mortgaging your property needs to be considered carefully as taking on more debt is a big decision– again, one of our advisers will go through this with you.
Whether you choose Equity Release or you decide to re-mortgage, you can gain access to some of the value tied up in your property.
“Choosing where you go for advice is one of the most important factors to consider.”
Peter McGahan, CEO Worldwide Financial Planning, writing about Equity Release
The Pros of Equity Release
Our CEO Peter McGahan has written about the pros and cons of Equity Release is his weekly columns for the media over the years but let’s touch on a few of the pros first and then below we’ll look at some cons. One of our advisers will go through this with you in detail. Equity Release allows you to release money from your property for you to spend. It gives you the opportunity to not have to repay the monthly payments but it will mean that the interest is added to the loan and will accumulate. If your home has seen an increase in value then you have the ability to unlock that extra cash.
The Cons of Equity Release?
As with everything, there are cons as well as pros. When you speak to one of our advisers, the adviser will explain the disadvantages to you. Part of these discussions will include lifetime mortgages which have higher interest than mainstream mortgages. The key disadvantage of equity release is that if you do not pay the monthly payments that debt accumulates and compounds. Going down the Equity Release route can also affect your access to benefits including any help which may exist from your local authority to cover the cost of care if that’s a situation you find yourself in.
Equity Release V Re-mortgaging?
Because you don’t have to make any monthly repayments with equity release you may be able to unlock more money from your home.
Your adviser will go through all of the checks with you.
The below are just a few things you and your adviser will consider;
- Would you qualify for mainstream re-mortgaging as opposed to later in life lending?
- What is affordable for you to do? Do you need to pass re-mortgaging affordability checks for the intended duration of the loan?
- Will there be affordability checks to go through for Equity Release?
- What are the legal fees attached to Equity Release?
What are the alternatives to Equity Release Mortgages?
Beyond Equity Release, yes, there are other options which you and your financial adviser can discuss. We go into this in more detail but to summarise you could consider a retirement interest-only mortgage, you could consider downsizing, you may be in a position to explore the possibility of renting out a room under the Government’s ‘Rent A Room’ scheme, and, also, you could consider a personal loan or using a credit card. Again, everything needs to be considered with much caution which is the benefit of having one of our advisers doing this for you. We go into this subject in a bit more depth here.
Is Equity Release the right thing for me to do?
With all things financial planning, it is crucial you consider all of your options – we are here to guide you every step of the way. Equity Release is no different. They are not for everyone so weigh everything up before you make a decision. All of our advisers understand that everyone’s situations are totally unique to them and so we help you choose the equity release product which is best for you. Taking an Equity Release plan is generally a long term option. However, there are flexible plans available which may fit your varying needs and some will allow you to repay in the future without any penalties. Our financial adviser can help you to choose the plan that is right for you.
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Frequently Asked Questions
The minimum age is normally 55. Providers do vary but to be eligible for a lifetime mortgage, it’s usually 55-years-old. We are all living longer so the earlier you start the more it’s likely to cost in the long run especially if you choose not to pay interest during the term of the lifetime mortgage. If you have another mortgage, or indeed other debts secured against your property, this needs to be paid off from the Equity Release, or, before you go ahead with the application for a lifetime mortgage.
Your adviser will assess your individual situation with you because there are a number of factors which need to be taken into consideration such as your age and also the actual value of your property.
Equity Release can be more expensive compared to normal mortgages. If you decide to take a lifetime mortgage you will normally be charged a higher rate of interest in comparison to the interest rate attached to an ordinary mortgage. Debt can escalate if the interest is rolled up. Your adviser will go through all of your options for you.
Products which fully meet the Equity Release Council’s Product Standards are required to feature a ‘no negative equity guarantee’. What this guarantee means is that your estate will never owe more than the property is worth when it is sold.
If you are considering an Equity release scheme as a means by reducing your inheritance tax, please discuss this with your adviser at Worldwide Financial Planning. The use of such a scheme will reduce the value of your estate.
An Equity Release mortgage can make cash available to you in the form of regular payments but also as a tax free lump sum. Before taking out an equity release mortgage, it’s important you take advice from one of our Equity Release specialists. Our work compliments the work of your Equity Release solicitor as this is a highly specialist area.
You are able to use your money to pay off debt, gifting, home improvements or even holidays. You can’t use the money, however, to invest in the market so there are a few restrictions.
Yes and this is often deemed to be the biggest downside of Equity Release. The interest rate is from two per cent and can be in excess of seven per cent normally and is fixed for the entire period. This can fluctuate with the changing interest rate environment too. Your adviser will talk you through this too.
You have two options – a lifetime mortgage or a Home Reversion scheme. Lifetime mortgages are the most common. We go into this in more detail here (INSET TEXT AS LINK TO BLOG POST) so have a read and your adviser will go through everything with you and answer any questions which you may have.
Releasing equity from a property is something people do in order to give wealth to members of their family free of inheritance tax. However, the ‘but’ is that you will have to live for at least seven years afterwards to ensure you escape the tax man completely. Our adviser will go through this with you.
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