The Pros & Cons of Equity Release [Our 2020 Guide]
With one in four retired homeowners now seeking equity release, the equity release market has doubled in size since 2016. For many retirees, their home isn’t just a source of comfort and security — it can also become a significant way to receive reliable and regular income. According to the review of the 2019 equity market by Key Advice, despite a backdrop of economic uncertainty, quarter three of 2019 has seen 11,772 plans taken out with over-55s releasing £887 million in equity — the largest volume and value of plans taken out so far in 2019.
Many homeowners seek equity release plans to pay for home improvements, clear debts or outstanding mortgage fees. But there’s also a growing number tapping into it to help their children take a step onto the property ladder — especially when house prices are high. If you’re over 55 and have paid off all, if not most of your mortgage, many equity release schemes allow you to release some of the funds tied up in your property, without the need to move out.
However, there are several implications surrounding equity release that homeowners should be aware of, including interest rates, redemption penalties and more. Here at House Buyer Bureau, we’ve created a guide explaining what equity release is and highlighting the pros and cons of taking out an equity release to help you make the right decision for you.
How Does Equity Release Work?
Put simply, equity release allows homeowners to release cash from their property without having to relocate and move elsewhere. There are two ways you can do this:
The most popular form of equity release plan is the lifetime mortgage, often with a drawdown plan that allows you to release funds regularly. Homeowners can take out a mortgage on their property while retaining ownership of it. With a lifetime mortgage plan, homeowners make regular repayments or let the interest roll-up — the unpaid interest of your plan adds to the total loan amount. This allows for debt to build up quite quickly, so if you’re in a position where you can afford to make regular repayments, the mortgage will end up being a lot less costly. If not, any accrued interest is paid back when you die, or when you require long-term care.
Home reversion plans allow homeowners to take small portions of cash, by selling shares of their house to a reversion provider, in return for cash or regular payments. How much you choose to sell is entirely up to you as a homeowner. However, if you do decide to sell it all, you reserve the right to continue living in the property, rent-free, until you die. The percentage homeowners retain will always stay the same, regardless of any unexpected change in property value. When you pass, your property will be sold on your behalf and all proceeds are shared out to the remaining people who hold shares of the property.
What Are the Advantages of Equity Release?
Equity release is the only way to extract a lump sum from a property, without downsizing or selling. It means there’s no need to move or relocate to a smaller property, as equity plans allow you to stay in your own home, rent-free. Most equity release plans offer a roll-up interest scheme. This means there are no implications if you choose not to pay regularly. Instead, interest will roll-up and will only be paid back later in life, giving homeowners the flexibility to pay off interest as and when they please.
While this may appear daunting, interest rates usually come packaged in a fixed scheme, so borrowers can easily work out and know in advance how much they may owe in the future — to avoid any hidden surprises. Most equity plan lenders, such as popular providers SunLife, Aviva and LV, are members of the Equity Release Council and abide by set rules regulated by the Financial Conduct Authority (FCA). These rules include the no negative equity guarantee, which means if your property value falls below the amount you owe in your equity scheme, you will not be required to pay the excess.
As well as being beneficial to the homeowner, equity release can be a great tax-free gifting alternative to family members. Taking out an equity scheme to release cash against the value of your property can be a way of gifting cash to family members, while completely removing the constraints of inheritance tax.
What Are the Disadvantages of Equity Release?
As equity release plans involve homeowners borrowing against their property or selling part of their property in return for cash payouts — with added interest rates — equity release can quickly become more expensive in the long term than selling your property to a reputable cash buyer. The effect of rolling interest means the outstanding balance homeowners may owe their equity provider can quickly become unmanageable. The standard fixed rate for most equity policies ranges from 3-4.5%, which can amount to double-figure interest charges in just a matter of years. You can use an online equity release calculator to work out how much money you can release from your home
If — for whatever reason — homeowners look to end their equity scheme early, they may meet with unexpected fees and penalties for doing so. Early repayment penalties can be as high as 25%, which can make switching to a cheaper provider almost impossible. Be sure to thoroughly read over the terms and conditions before agreeing to the scheme, to look for any hidden early termination costs and fees.
Equity release can also directly affect your entitlement to state benefits, including state pensions, free dentistry, council tax and more. Depending on your circumstances and your reasons for wanting to release the equity in your property, you may lose your right to government support. It can be useful to seek professional advice from a financial advisor as it’s crucial to read the fine print in your equity scheme so you have a solid idea of what you can expect to receive — or lose — if you go ahead with a plan
Homeowners also remain responsible for the general upkeep of their property as part of an equity scheme. Even if you choose to take out a home reversion plan where your provider is only entitled to a certain percentage of your property, all general upkeep and maintenance is entirely your responsibility. This can become a costly, challenging and time-consuming task for homeowners, as when we age, we typically want to rest up and enjoy retirement, without the worry of having to upkeep our property to a particular standard.
An Alternative to Equity Release
If you’re reading this post as a homeowner who is considering alternative ways to raise money relatively quickly without investing first and sacrificing state benefits, there are other reputable options worth considering. At House Buyer Bureau, homeowners have the freedom to sell their house without any hidden fees, interest rates or surprises.
Our reputable, friendly house buying experts are on hand to guide you through our quick sales process and can make you a competitive, formal offer for your property — regardless of its current state. Genuine cash buyers often buy homes in any condition, with no inconvenient long chains, viewings or unnecessary delays — just the guaranteed certainty of a quick cash sale.
Once approved, homeowners can gain access to funds, without any hidden charges or fees, within as little as seven days — allowing you to downsize efficiently and use the remaining funds to treat loved ones, pay off debts, or simply enjoy an extra source of income. Get in touch with one of our friendly house buying experts today, or visit the House Buyer Bureau website to receive a free, no-obligation cash offer for your property.