Is Equity Release A Good Idea for 2022

What is equity release?

Equity Release is a way to unlock money from the value of your property.

You normally do this by taking out a mortgage loan secured against your home. However, you can also do so by selling a share of your property to an insurance company. It depends on the specific product you choose.

People typically use these products to top up the money from their pensions, help out younger family members, or make home improvements.

To use these services, you must be at least 55 years old. This is the minimum age for a life mortgage. However, you must be at least 65 for a home for life plan. 

You also need to own a property in the UK worth a minimum of £70,000. It must be in good condition.

There are usually no monthly payments to be made, and you get to continue living in your home without paying rent.

What are the advantages of equity release?

Lifetime Mortgages

  • Lifetime mortgage equity release interest rates are fixed for life. Standard equity release rates of interest in 2020 are between 4-6% AER, although you may find that the cheapest schemes start at around 2% AER.
  • Because the percentage of interest on your loan is fixed, debt can build up quickly and the product can become very expensive. Interest will continue to roll up on the amount you borrow for the rest of your life.
  • You will not be able to leave your home to your family as inheritance. This is because your house will be sold either upon your death, or after you enter long-term care, in order for your loan and its interest to be repaid.
  • Like their name suggests, a lifetime mortgage is a lifelong commitment. It is very difficult to terminate the plan early. If you do later decide that you want to end the agreement, you will need to pay an Early Repayment Charge which can be very costly.
  • You cannot take out any other mortgages secured against your home will you have a lifetime mortgage. Any outstanding debts of this kind must be paid off when you receive your cash lump sum.
  • There are additional costs that you must pay during the application process. For instance, you may need to pay a fee for the valuation of your property, or pay for independent financial advice.
  • The maximum loan you can receive with a lifetime mortgage is calculated using a certain percentage (LTV) of your property’s true market value. An average LTV is about 25-35% of the price your property is worth.
  • Getting an equity release loan can negatively impact your tax position. You may also lose your eligibility for means-tested benefits and pension credit, both now and in the future.
  • Equity release is not an appropriate option for you if you are currently living with any dependants.

What are the disadvantages of equity release?

Again,  the exact disadvantages depend on your financial situation and the type of equity release product you select. Below are some of the pitfalls that you might come across.

Speak to an independent adviser to receive more personalised financial advice about how equity release might affect your individual situation both now and in the future.

Lifetime Mortgages

  • Lifetime mortgage equity release interest rates are fixed for life. Standard equity release rates of interest in 2020 are between 4-6% AER, although you may find that the cheapest schemes start at around 2% AER.
  • Because the percentage of interest on your loan is fixed, debt can build up quickly and the product can become very expensive. Interest will continue to roll up on the amount you borrow for the rest of your life.
  • You will not be able to leave your home to your family as inheritance. This is because your house will be sold either upon your death, or after you enter long-term care, in order for your loan and its interest to be repaid.
  • Like their name suggests, a lifetime mortgage is a lifelong commitment. It is very difficult to terminate the plan early. If you do later decide that you want to end the agreement, you will need to pay an Early Repayment Charge which can be very costly.
  • You cannot take out any other mortgages secured against your home will you have a lifetime mortgage. Any outstanding debts of this kind must be paid off when you receive your cash lump sum.
  • There are additional costs that you must pay during the application process. For instance, you may need to pay a fee for the valuation of your property, or pay for independent financial advice.
  • The maximum loan you can receive with a lifetime mortgage is calculated using a certain percentage (LTV) of your property’s true market value. An average LTV is about 25-35% of the price your property is worth.
  • Getting an equity release loan can negatively impact your tax position. You may also lose your eligibility for means-tested benefits and pension credit, both now and in the future.
  • Equity release is not an appropriate option for you if you are currently living with any dependants.

Is equity release safe?

It is only natural that you want to answer the question “how safe is equity release or is equity release safe”.

You will be pleased to hear that all equity release products are authorised and regulated by the Financial Conduct Authority and Equity Release Council.  The Equity Release Council build protections into every approved provider’s plans. Therefore, they can be viewed as relatively safe.

For example, they include a no negative equity guarantee. This ensures that you will never have to pay back more than the total value of your property.

The no negative equity guarantee can reduce worries because you will know that despite the fixed interest rate, your loved ones will never end up owing more than you can afford.

In a home reversion scheme, you will also be granted a Lifetime Lease. This legal document promises:

  • That you will be permitted to continue living at home for the rest of your life even though you are no longer the sole homeowner;
  • And that you will never owe any money as rent while you live there (unless your deal specifies that you pay a small amount of money as nominal rent to the landlord, such as £1 or £2 a month).

 

Is it worth taking equity release?

As outlined above,  the risks associated with equity release depend on which type of equity release you are interested in. It is important to remember that any kind of equity release may impact your tax position and your eligibility for means-tested benefits both in the present and in the future.

Using equity release to unlock some extra income or a lump sum will also mean that your family have less to inherit.

When you unlock equity from your property, you are making a lifelong commitment. It is extremely difficult to back out once you have signed the deal.

If you decide you no longer want the agreement, you will need to pay a large Early Repayment Charge.

You should contact us for more information about the pros and cons of releasing equity from your home.

We can give you more details about the range of plans on offer, the featured content, and the difference in rates across the services providers.

We will also explain the alternatives that you have available.