A Breakdown Of The Pros and Cons Of Equity Release Products
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- Do you have a mortgage you need to pay off?
- Do you require money for repairs or home improvements? Like a new kitchen or bathroom.
- Would you like to help a family member purchase their first home?
- Would you like to pay off all your credit cards and loans and have zero monthly payments?
- Would you like a better lifestyle, change your car or have a well-deserved holiday?
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Equity Release For and Against
As with all financial decision making, there’s ups and downs to all products. Part of the service 1st UK offers is impartial equity release assistance from qualified and knowledgeable experts, providing essential information consumers need to make sound financial decisions.
When you know the pros and cons of equity release, you’ll be better equipped to see if you’ll benefit from this type of borrowing, or if there are more downsides than you’re comfortable with, leading you to decide on an alternative to lifetime mortgages.
Read through our explanations of the pros and cons of equity release to find out if this can help you to free up money from your property and if so, what disadvantages you’d need to consider.
How You Could Benefit from Equity Release (Pros)
Tax-Free Cash Payments
Equity release schemes can help you raise finance for any purpose. You can spend the cash as you like, be it kitchen remodelling, paying for your kid’s first deposit on a new flat, buying a new car, or taking a luxury holiday for your Golden anniversary.
The equity you have tied up in your property can be used to add additional income to your retirement fund or to supplement your salary by releasing money from your home at any time.
Drawdown options allow you take an amount under a lender’s minimum amount (usually £10,000, subject to minimum loan requirements), taking what you need when you need, and leaving the surplus amount on reserve to withdraw at a later date. This can allow you to receive an initial loan out of £10,000, releasing incremental loans under your maximum loan amount, only paying interest on money released thus avoiding the interest on reserve funds.
All withdrawals are paid as loans, avoiding the need to pay additional taxes.
Zero monthly repayments
Another name an equity release scheme is known by are lifetime mortgages. As the name suggests, it’s for life. However, there is a degree of flexibility with equity release. You can choose to roll up the interest you would be paying on any type of home loan and only repay the loan plus interest upon the sale of your property.
The interest roll-up option would mean you’d be required to pay nothing back, completely enjoy all the benefits of a tax-free cash payout with nothing to pay back during you or your partner’s lifetime. The loan can be repaid upon the death of the homeowner (or both on joint lifetime mortgages) or when both you and your partner are in long-term care, and in a position to sell your home.
Borrow with a tenure guarantee
Equity release schemes are a type of secured borrowing for homeowners, without the risk of the lender selling your property if you miss your monthly repayments because there are none.
With other types of secured finance, you must keep up the repayment schedule. With most equity release products, you can choose to repay capital plus interest only when you or your partner are both in care homes for the long-term, or deceased. In basic terms, equity release lets you take some of the nest assets that’d be left in your Living Will and take a percentage for yourself/yourselves to enjoy a better quality of lifestyle in your retirement.
The guarantee with equity release schemes is the lender can’t force the sale of your home to recuperate monies owed. The lender has to wait until the homeowners die or go into long-term care homes before the property can be sold and the loan repaid from the proceeds.
“No negative equity” guarantee
Only when your home is sold will the loan be repaid. All lenders approved by the Equity Release Council offer this protection as standard. You need this because it prevents beneficiaries of your Will (your family) being left owing more money than your home is worth.
High level of consumer protection
The Equity Release Council (ERC) set the standards for conduct, ethics, and codes of practice. The Financial Conduct Authority (FCA) is the professional body responsible for regulating the market. A combination of the ERC setting the standards and the FCA regulating the financial products industry as a whole, give you, the consumer, a wide degree of financial protection, both for your protection and looking after the financial interests of your family or beneficiaries.
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The Downside (Cons) Of Equity Release
Reduced estate value
Your property will be worth a considerable amount to your estate. It may be the only financial asset you have to leave your family.
Equity release schemes release the money from your property wealth, which will mean when your home is sold, the loan is repaid from the proceeds, reducing the overall value of your estate, whereby it will affect the inheritance value for whoever you intend to leave your estate to in your Will.
Current eligibility to State benefits could be affected
The UK provides a range of means-tested benefits such as pension credits. Any means-tested State benefit you’re entitled to currently, could change if you release equity from your home to increase your savings. While there’s no limit on the amount of savings you’re entitled to, the amount of money you receive from pension credits will change if your savings increase above £10,000.
Early repayment charges (ERCs) can be steep
Equity release is mostly beneficial for long-term borrowing. Most have high early repayment charges (exit fees) applicable to repay the entirety of the loan. The only exception is if you choose to use a lender with a downsizing guarantee, as there are some equity release companies that will allow you to sell your home, move to a smaller apartment or other dwelling and repay your loan free of ERC’s, subject to the terms of your agreement.
As the early repayment charges can amount to a substantial sum, it’s imperative you consider the likelihood of paying early in the future as it will affect your total cost of borrowing.
Costly setup fees
The cost of setting up a Lifetime Mortgage can be high, depending on a few variables. Some of the fees you’re likely to encounter include:
- Fees for a home valuation report
- Legal fees
- Admin/application fees
- Advisory costs as most lenders do not offer equity release schemes without professional advice
Due to the high cost of equity release schemes, it is advantageous to compare the whole of market, taking into consideration the costs overall and not just the interest rates.
Problematic future refinancing of your property
As equity release schemes are designed for long-term borrowing, it’s worthwhile considering from the outset how much you want to apply for because refinancing will be more difficult once you have a loan in place as it’s secured against your property. Without forward planning of potential future financing needs, you could see yourself with difficulty refinancing your home in the future because you don’t own 100% equity.
The Types Of Equity Release Schemes
Cash-free lump sum with interest roll-up lets you repay from the sale of your property. Most companies will give you the option to make voluntary payments towards the whole or part of the interest each month. Lifetime Mortgages can be Roll Up, Fixed Repayment, or Interest Only.
Drawdown Lifetime Mortgages – You agree on a total loan amount and only withdraw in incremental amounts until you reach your maximum. The benefit here is you keep interest repayments down as you’re just paying interest on what’s borrowed and not on reserve to release in future years.
Most equity release firms will have a minimum withdrawal amount and a fixed-term period for you to withdraw, such as 15-years. The interest rates can also be variable based on when you release the funds, instead of locked in from the outset. Home Reversion Plans – when you sell a proportion of your home equity (often below market value).
2022’s Most Popular Types of Equity Release
According to the Autumn Statement from the Equity Release Council, the most popular equity release schemes (2018) are drawdown and lump sum. 65% of new lifetime mortgage customers choose drawdown, 35% opt for the lump sum payout and only a tiny minority representing less than 1% of all new customers are content with home reversion plans.
Need Our Help to Compare Equity Release Schemes?
At the start of 2022, there are 139 products from 88 equity release companies, each regulated by the FCA requiring financial advice before you can apply. We’ll compare them all, review the costs, walk you through the fine print and explain the entire process in simple terms.
Our team will guide you through all borrowing options, and explain if equity release is suited to your circumstances and if not, then what.
When we know it is, we’ll compare all 139 current products from the 88 specialist equity release companies using our bespoke equity release over 55 calculator and let you know the providers with the best terms and rates.
Equity release advice from an independent financial adviser
A qualified equity release adviser will be able to use a free equity release calculator to tell you exactly what cash lump sum you can get. The best offerings involve fixed interest rates so you know the interest costs so borrowing money is far less risky.
Years ago equity release interest rates were much higher than they are now and were only really ideal for people that had an existing mortgage to repay.
The worst situation is having a lifelong commitment of compound interest with house prices going down.
If you have retirement income a specialist adviser personalised illustration may suggest an RIO mortgage for you instead of a home reversion scheme. In this case, a mortgage arrangement fee may be will well worth paying.
If you think you may move house to a smaller property an early repayment charge could be very high and home reversion schemes can be even worse to deal with.
You should also seek professional advice on the impact on means tested state benefits and your pension credit. The extra cash from the equity release provider or equity release company could mean you get fewer benefits.
Costs involved in an equity release product
- Valuation fees to establish how much equity you have based on the full market value
- Completion fee
- Expert advice fees with a study of your individual circumstances
- Legal advice fees
- Equity release arrangement fees
Borrow money using an equity release specialist
An equity release plan from a company like key equity release will likely turn out much better than a home reversion plan as with reversion you sell part of your home for a low cost much lower than the open market property value.
The lowest overall cost for unlocking cash in later life is available to people with a substantial regular income. These people can get a RIO mortgage where you don’t add interest costs to the loan. You make monthly payments towards the loan so the interest rate is lower. Before you look at RIO mortgages you have to be aware that your monthly outgoings will be assessed by an advice team who can make an informed decision.
A specialist will likely tell you the minimum age for all homeowners is age 55. Only smaller amounts can be borrowed against your current home when you are under aged 65. If your property’s value doesn’t go up over time the compound interest could overtake your remaining full value.
What happens if I have to move into long term care?
If you need to enter long term care or need semi permanent care, the equity release scheme ends and your home is sold. The principal and any interest accrued on the loan are deducted from the sale price and the remaining money is yours.
Is equity release safe?
Equity release is regulated by the financial conduct authority. It is strictly regulated. Is it a good or bad idea? Well, that depends on your ability to get a low interest rate and the type of equity release you signup for, it’s a big decision.
It’s fair to say it is not dangerous but the potential drawbacks are if the value of your home goes down you could end up with very little money left over.