The term ‘equity release’ is used when referring to products that allow homeowners to unlock cash from the equity accumulated in their property, but without having to sell up or move. The amount of ‘equity’ is calculated based on the properties current market value, minus any mortgage or debt which might be held against it.
Available to homeowners over the age of 55, this can be a great solution for those who are looking to release some of the money tied up in their property. Whether you are looking to do some home renovations, go on the holiday of a lifetime, pay off some debt or maybe just relax with a more comfortable retirement, the tax-free cash from equity release is yours to spend as you wish.
There are two main types of equity release. The most popular is a ‘lifetime mortgage’ with which you continue to own 100% of your home and the other, known as a ‘home reversion plan’ involves selling a percentage of or all of your home. So what are the benefits of equity release?
Equity release – the pros and cons
Equity release can be a great option for those who are looking to improve their quality of life or want the financial freedom of having money to spend on the things they really want. However, equity release does have its pros and cons and although it is beneficial for a lot of people, it is not suited to everybody. It is always important that before making such a big financial decision you take the time to properly consider both the advantages and disadvantages.
Advantages
- The money released is tax-free and can be spent any way you like.
- You get to stay in your own home without the need to move or downsize. This means you get to enjoy your retirement in the house you love and you are able to continue to live in your home until the last borrower moves into full-time care or passes away.
- You can receive the money as either a tax-free lump sum or in smaller, regular payments.
- Depending on the type of plan that you take out, you could benefit from future rises in the value of the property.
- Because equity release is transferable, if you wish to move home in the future then you can do so, as long as the new home meets the suitability criteria.
- Lifetime mortgages do not require you to make any monthly repayments but instead the interest rate is rolled-up, meaning that during your lifetime you have nothing to pay. Once you pass away or move into full-time care, the house is sold and the money used to pay off the loan along with the interest. The remaining money passes on to your estate and beneficiaries.
Disadvantages
- It can reduce the value of your estate meaning that there will be less money left for beneficiaries.
- In some cases, equity release can affect a person’s entitlement to certain means tested benefits that are being received now or will be in the future. It is always advisable to look into this properly beforehand.
- A home reversion plan means that the home reversion company will own all or a percentage of your property.
- For those receiving care at home partially or fully funded by the local council, equity release can mean that they are no longer eligible and will have to pay more towards it.
Is releasing equity safe?
Making a big financial decision can be daunting and is it extremely important that you take the time to thoroughly research and understand what exactly equity release is and if it is safe before you proceed.
In terms of risk and financial safety, there are a number of measures in place to help ensure the protection of homeowners including;
- Equity release is regulated by the Financial Conduct Authority (FCA) who has a strict code of conduct that all brokers, advisors, lenders and products must adhere to.
- There is a “no negative equity” guarantee which ensures that you will never have to pay back more than the value of your property.
- The ‘security of tenure’ means that homeowners are guaranteed to be able to continue living in their property until they die or move into long-term care. This is something that isn’t available with retirement interest-only mortgages (RIOs).
- Those who are considering equity release are strongly encouraged to engage with an independent financial adviser who will be able to assess your options and provide honest, impartial, unbiased advice on what is best for you.
