If you’re over 55 and own your own home, you may have considered equity release. Particularly in the current economic climate resulting from the coronavirus pandemic, it’s one way to get your hands on some extra cash if you need it.
Equity release isn’t always straightforward, though, and can be an expensive way to raise cash. It’s important to understand exactly what it is, the options to choose from and the costs involved. Here, we’ll provide you with that information to help you make a decision.
What is equity release?
If you have equity in your home and are over 55, you can use an equity release product to access that equity. You can receive the money in a lump sum, smaller amounts at regular intervals or a combination of these. There are two types of equity release products — a lifetime mortgage and a home reversion plan.
A lifetime mortgage
This is the most common choice of equity release product. The mortgage is secured against your home and you retain ownership of your property. Unlike a standard mortgage, a lifetime mortgage isn’t paid back until you either move into long-term care or die. Some lifetime mortgage plans allow you to make monthly interest repayments, which reduces the overall amount owed. Usually, however, the interest is rolled up, or compounded, so that the amount owed gradually increases. In the event that you move into long-term care or die, your estate then repays the loan and compounded interest.
A home reversion plan
A home reversion plan isn’t a loan so you don’t pay any interest. For this equity release product, you sell part or all of your home below market value to a provider in exchange for a tax-free lump sum and a lifetime lease. You then continue living in your home, rent-free and without any restrictions, for the rest of your life. When the property is sold after your death, the provider receives its share of the proceeds. If the value of your property has increased, this means the amount the provider receives increases accordingly.
What costs are involved?
The interest rate charged for a lifetime mortgage is generally higher than that of a standard mortgage. If you choose to let the interest compound rather than making monthly interest repayments, the debt builds up very quickly. This reduces any inheritance to be passed on to your family.
With a home reversion plan, the amount you receive is considerably lower than the market value, usually between 20% and 60%. If you decide to buy back the share of the property, the provider will charge the full market value.
As well as these considerations, you need to factor in the arrangement fees. These can range between £1,500 and £3,000 and include the application fees, valuation fees and legal costs.
Factors to bear in mind
Here are some other points to consider before making your decision:
- If you decide to repay your lifetime mortgage early, you will be liable for early repayment charges. Check this with the provider before committing to this type of equity release product.
- With both equity release products, the value of your estate is reduced so you have less to pass on to your beneficiaries.
- Releasing equity from your property means you might restrict yourself in the future if you need money for something else during your retirement.
- Your entitlement to state benefits, such as Universal Credit, support with health costs and Pension Credit, may be affected by equity release.
- Equity release may affect your tax position so speak with a financial adviser first. When you reduce the estate’s value, the inheritance tax is reduced but the equity release product may cost more than the tax saved.
- Ensure that your equity release product has a ‘no negative equity guarantee’. This means that your estate is not liable for more than the value of your home when it is sold.
Is equity release the right choice for you?
Equity release is a good way to get a tax-free lump sum without having to make monthly repayments if you’re over 55 and a homeowner.
You may prefer to remortgage, though. Competitive rates mean that you might be able to secure a better deal with lower monthly repayments. That can ease the pressure with your monthly expenditure. You might also be able to raise cash via a remortgage if you have equity in your property.
Another option is to downsize. You could sell your current home in Bexley and move to a smaller property in Bexleyheath, for example. The money left over from the two transactions will provide you with the extra cash you need.
There are various positives and negatives for equity release so speak with a specialist mortgage broker for expert advice. He or she will assess your circumstances and needs, advising you on every aspect of equity release and the alternatives available. In this way, you can make an informed decision as to whether equity release is right for you.