Equity release is the process of accessing the value of your home by borrowing against it. Here are five things you need to know before considering equity release for yourself or a loved one:
1. Funds Can Be Released as a Lump Sum or Income
When you release equity from your property, you’ll have the option to choose to take the funds as a lump sum or as income, depending on which mortgage company you choose. A lump sum can be beneficial if you want to use the funds for a specific purpose, such as travelling, renovating your home or sharing with friends and family. Alternatively, a regular monthly income via an equity release could be a viable way to ensure you have the funds you need to support yourself.
Some equity release companies offer both lump sum and income options, but not all do. Before you decide whether to release equity in your property, be sure to consider whether a lump sum or income is best suited to your needs.
2. You Won’t Be Able to Leave Your Property as an Inheritance
If you own your own home, you may plan on leaving it to your family or friends following your death. For many people, being able to leave a property as a form of inheritance is the culmination of years of hard work and you may be eager to provide for your loved ones in this way.
When you take on an equity release mortgage, however, you’re agreeing that the lender will be paid back upon the sale of the property. It is generally written into the terms of the contract that a sale must take place when you vacate the property. If you require care as you get older and you move into a retirement flat or supported living accommodation, for example, this may mean that your property has to be sold and the lender paid what they’re owed.
If you remain living in the property until your death, the executors of your will are tasked with ensuring that the outstanding liabilities are met. This means selling the property and paying the lenders the sum that is owed.
Depending on the value of the property and the amount of equity you have released, you may still have some funds to leave to beneficiaries, such as your family and friends. However, if the property needs to be sold to pay back the lender, you won’t be able to leave it to your nearest or dearest. On the other hand, equity release could give you the opportunity to access funds now and share with your friends and family, potentially avoiding liability for inheritance tax in the future.
3. Your Benefit Entitlements May Be Affected
Equity release UK can be an effective way to access funds when you need them, using your property as collateral. Generally, people will have the funds transferred into their bank account when they release equity from their home, either in one lump sum or via regular monthly payments. Of course, these assets are taken into account when your benefit entitlements are calculated, which may mean that you won’t receive additional financial support from the state.
This is certainly something you’ll want to consider if you envisage yourself needing care in the future. Depending on how the laws and regulations change in the future, having funds sitting in your account or a regular income may mean that you’ll be required to fund the cost of any support you need in later years.
For some people, an equity release can negatively affect their benefit entitlement and actually leave them worse off, so it’s important to consider the long-term consequences of releasing equity from your property before you decide what’s right for you.
4. Compound Interest Can Increase Your Debt
If you choose to take out a lifetime equity release mortgage, it won’t need to be paid back until you go into long-term care or until you die. This can certainly seem advantageous if you want to keep your financial obligations low within your lifetime, but there can be disadvantages too. When interest is added to the loan amount and the interest that’s already accrued, it can mean that your debt increases quite significantly over a relatively short amount of time.
This is known as ‘compound interest’ and it can have a substantial impact on the total amount that’s owed. Even though it won’t be paid back until you’re no longer living in the property, it does mean that your debt will continue to rise throughout this time.
5. You Can’t Borrow Against Your Home in the Future
Owning a property is a considerable asset and it can often be used as collateral. Once you’ve decided to move forward with an equity release mortgage, however, you won’t be able to use your property as collateral for any loans in this future. Essentially, you’re tying a large asset up when you take out a mortgage with equity release companies, so you need to be completely confident that it’s the right option for you.
If you decide to release some of the equity in your property, rather than all of it, you may find that some lenders will permit you to release the remaining equity in the future. However, this isn’t guaranteed, so think carefully about whether you’re willing to use your main asset in this way before you agree to an equity release mortgage.
Is Equity Release Right for You?
As you can see, there are advantages and disadvantages associated with equity release mortgages. When you’re deciding which type of mortgage loan is right for you, it’s important to get impartial and independent advice. By working with a broker, you can explore what types of mortgages are available to you and what deals or interest rates you can get. Following this, you’ll be able to make an informed decision about whether or not an equity release mortgage is your best option.
Clients should be aware that they are not eligible for Equity Release unless the sole applicant, or both applicants are minimum age 55.The normal maximum advance at age 55 would be 25% of the equity with the property being mortgage free, which would be a condition of the advance.
The maximum advance does rise for older clients although their health may also have an impact on the advance that is available, with a ceiling of 55% loan to value of the property equity.
Any advance made to clients would of course be TAX FREE.