A lot of people aged over 55 find themselves in the position of owning a property with a soon to be paid off mortgage but little cash to spare.
With retirement on the horizon, many consider releasing equity from their property to free up some money. In fact, almost 39,000 homeowners used Equity Release in 2018 alone.
But should you consider Equity Release and how will such a substantial loan affect your future finances?
What is Equity Release?
Equity Release is a type of loan that is secured against your home.
If you qualify, you can draw a lump sum of money or regular smaller sums, from the value of your home. A big appeal of Equity Release is that despite the loan being secured against your property, you can still live there.
The amount of equity you can release from your property depends on many factors including:
- Your property’s value
- How much equity you own in the property
- Your age
- The amount of income you have or may have for the duration of the loan
- Your health
- The type of property you live in
- Your credit history
How does it work?
When you apply for Equity Release, the lender will arrange for your house to be valued. They will want to know how much equity you currently own in the property as usually the more equity you own, the higher the amount you can borrow.
Is Equity Release popular?
According to the Equity Release Council, there is a huge demand for Equity Release loans with double the amount of lenders now offering the product since 2016.
In August 2018, 139 Equity Release schemes were available, which is a rapid increase on the 58 schemes offered two years ago.
What can the money from Equity Release be used for?
There are lots of reason as to why a homeowner might take out an Equity Release loan including:
- Home improvements
- To go travelling
- Retirement fund
- To help a loved one on to the property ladder
Can you use the funds to settle debts?
Some people also take out an Equity Release loan to settle their debts.
This can work out cheaper than paying interest for several loans or debts however, you should always compare the interest for the debts against the interest you will pay for the Equity Release loan.
When do you pay back the loan?
The remaining balance is paid back when you die or move into long-term care. Your house will be valued by an independent surveyor (in case the property value has increased or decreased) and then it will be sold.
Any proceeds of the sale will be used to clear your Equity Release loan and anything left is given to you or inherited by your beneficiaries.
What are the pros of Equity Release?
- You can take the money in a lump sum, as drawdown or as a home reversion plan
- You don’t have to move
- Usually no monthly payments
- Some products will allow you to release more Equity in the future
- Releasing cash against your home could allow you to gift money to family, free of inheritance tax
What are the cons of Equity Release?
- Releasing equity could affect your entitlement to certain benefits
- Your property could decrease in value and so after paying back your loan from the sale of our home, you may be left with less money than you thought
- Releasing equity from your property will decrease the amount of inheritance you might leave
- Any early repayments could result in a penalty charge
- No other loans could be taken out against your home
- The interest of the loan can build up quickly and can be expensive
Check the small print
Before signing any contract with a lender, read through the terms of your loan and make sure you understand:
- When you are expected to pay the full loan
- The rate of interest you will be charged
- How the loan could affect any benefits you recieve
You should also check that the lender is a member of the Equity Release Council. This will give you some assurance and will also mean that they have a no negative equity guarantee.
This is important as this guarantee ensures that if your loan exceeds the value of your property, that the lender will take this risk and will not ask you to meet the shortfall.