Equity release is a way of releasing the wealth tied up in your property without having to sell it and move to another home. You could either borrow against the value of your home, or sell all or part of it in exchange for a lump sum or regular monthly income. It’s also possible to release more equity from your property later in life if required. Equity release is designed to help customers over the age of 55 years who own their property outright or have small mortgages left to pay
For many people, unlocking money tied up in property can make a real difference, whether you’re thinking about family, consolidating debt, or even home improvements. However, you should consider several important factors before deciding on equity release.
Cost
Cost Equity release can be more expensive when compared to an ordinary mortgage. When taking out a lifetime mortgage, you will typically be charged a higher interest rate than you would on a standard mortgage, and the debt can grow quickly if the interest is rolled up. The plan provider charges more interest because they must factor in safeguards such as a no negative equity guarantee (so you will never owe more than the value of your home, regardless of interest payments due, and any changes in property value) and a fixed interest rate for the life of the plan. These safeguards mean the interest rate is different to an ordinary mortgage.
Term
For lifetime mortgages, there is no fixed ‘term’ or date by which you are expected to repay your loan. The interest rate of a lifetime mortgage will not change during the life of your contract, unless you take additional borrowing, and then it will only apply to that cycle of extra borrowing.
Value of home
In most cases, you are more likely to get a higher value sale when selling your home in the open market rather than through a home reversion plan.
Future needs
If you release equity from your home, you may be unable to rely on your property for money you need later in your retirement, such as long-term care.
Flexibility
A lifetime mortgage can impact your flexibility. For example, if you move home and take your lifetime mortgage with you, you may not have enough equity in your home when you decide to downsize later in life. In this instance, you may have to repay some of the mortgage.
Impact on state benefits
The money you receive from equity release may affect your entitlement to state benefits.
Tax
You will not usually have to pay Income or Capital Gains Tax on the amount you receive when it is released from your main home.
Fees/charges
You must pay arrangement fees which include solicitor and advice charges. If you change your mind, there could also be early repayment charges to pay, although these would not apply on death or long-term care planning.
Estate planning
When you take an interest roll-up plan, you will have less to pass on to your family as an inheritance.
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