The Pros & Cons of Equity Release
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 a reliable day-to-day income. According to the latest half-year review of the 2019 equity market from Key Advice, despite a backdrop of economic uncertainty, 22,126 homeowners took out an equity release plan, increasing the growth in equity plans by a substantial 5%.
Whilst many homeowners take the opportunity to seek equity release plans to pay for home improvements, clear debts or outstanding mortgage fees, there’s also a growing number of homeowners tapping into equity release to help their children take a step onto the property ladder. 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 highlighting the advantages and disadvantages of equity release for our readers to help guide you to making the right decision for you.
Equity Release: How does it work?
Equity release put simply, allows homeowners to release cash from their property without having to relocate and move elsewhere. This is typically done through two plan options:
The most popular form of equity release plan is the lifetime mortgage. Homeowners are granted the ability to take out a mortgage secured on their property, whilst retaining ownership of the property. With a lifetime mortgage plan, homeowners have the ability to make regular repayments or let the interest roll-up, where the unpaid interest of your plan is added 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 out 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 choose to sell it all, you reserve the right to continue living in the property until you die, rent-free. The percentage homeowners retain will always stay the same, regardless of an unexpected change in property value. When you pass, at the end of your home reversion equity plan, 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 funds from a property, without downsizing or selling. This means that there’s no need to move or relocate to a smaller property, as equity plans allow you to stay in your home, rent-free. With most equity release plans offering a roll-up interest scheme, this also means that 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. Whilst 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, which includes the no negative equity guarantee. This means that 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 as a 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 home can be a way of gifting cash to family members, whilst completely removing the constraints of inheritance tax.
What are the disadvantages of Equity Release?
As the nature of 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 what selling your property to downsize with a reputable cash buyer would be. The effect of rolling interest means that 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.
If for whatever reason homeowners look to end their equity scheme early, they may be met 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 your plans agreed 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 benefits, including state pensions, free dentistry, council tax and more. Depending on your individual circumstances and your reasons for wanting to release the equity in your property, you may lose your right to government support. It’s crucial to read the fine print in your equity scheme to have a solid idea of what you can expect to receive, or lose if you choose to 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 costly and a harder, 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 your 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 without sacrificing government 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. House Buyer Bureau 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 with the process of completion taking as little as seven days, without any hidden charges or fees, giving you the ability 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.