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You might consider equity release a good option, but you should weigh the pros and cons carefully before making any major decisions. Equity release can be a great way to improve your quality of living. However, you need to know what the drawbacks are. There are two types of home reversion plans and a lifetime mortgage. You should research the differences between them to determine which one is right for you.
What are the benefits of equity release?
The FCA regulates equity release schemes. These are safe ways to get some equity from your property. You can use this tax-free cash in any way you like, whether it’s in a lump sum or in installments.
Spend however you want with tax-free cash
The money you release is exempt from tax. The following are the most common reasons that people release equity:
- to clear their mortgages or other obligations
- To make home improvements
- To increase their income and to live more comfortably
- To support their family
- To purchase something for oneself, such as a holiday.
You can stay at home
Equity release lead generation uk is an alternative to downsizing. You can sell your home and move to a smaller home that is less expensive. Then you can use the difference however you wish.
Equity release makes it easy to leave the house. Some people release some money to improve their homes. This may allow them to live comfortably in retirement, without having to worry about making changes or fixing up the house.
You can retire in the home you love and you won’t have to move.
Unless you choose to, there won’t be any monthly payments.
The loan and interest will not be repaid unless your home is sold or you move into permanent residential care.
This means your monthly outgoings will not go up. This can be a great help when organizing your finances. Some people prefer to pay the interest down to reduce their debt. You can choose an interest-only lifetime mortgage if you feel this is the right option for you.
You won’t owe anything more than what your home is worth
Members of the Equity Release Council can offer lifetime mortgages with a “no negative equity guarantee”.
This means that your family can keep all debts in check after you have sold your home or moved into long-term care.
Low interest rates will be available to you
Current equity release interest rates are at a low level.
Access the money whenever you need it
You have the option of taking out a lump sum or a drawdown mortgage that allows you to access cash in smaller increments over time. This could provide regular income up to the limit of your plan provider. You will not be charged interest until you use the amount.
Avoid inheritance tax
Equity release is a way to gift your family cash and avoid inheritance tax.
The rules for inheritance tax can be complex. Before you give any money, get professional advice.
What are the downsides to equity release?
Equity release comes with its limitations, as do many other products. Equity release is secured by the property value and will have to be repaid when you die or are placed in permanent care. The inheritance amount you can leave behind will also be reduced. You can also find other considerations below.
Interest increases your debt
This is because compound interest has a significant effect. This is where interest is added to the loan amount and any interest already built up.
The amount owed on a lifetime mortgage does not have to be repaid until your death or long-term care. It can grow quickly over time.
This could be done by gradually paying off the debt with an interest-only mortgage for life.
To learn more, read our article about the cost of equity release.
You might lose your benefits
You can lock cash out of your home to reduce its value. However, by keeping any unused funds in your account, you could be unable to claim future means-tested state benefits such as pension credit, savings credit, or council tax benefit.
Even if these benefits are not available to you right now, you should think about whether or not you might need them in the near future.
There may be early exit fees
A lifetime mortgage is a commitment that will last a lifetime. You may be required to pay a redemption fee if you pay the mortgage off too early. Be sure to check the charges that may apply.
As an inheritance, you can’t leave your house.
Most plans require that your property be sold in order to repay the provider. Any money that is left after the death or move out will be paid to the scheme provider.
Setup fees must be paid
For professional advice and arrangement fees, you will need to pay.
You can’t get another loan for your house.
After you have taken out equity release, any other loans that are secured by your home cannot be taken out. Some providers will allow you to borrow more equity if there is equity remaining in the property.
