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Equity release schemes can be a fantastic way to get access to cash in your retirement to help supplement your living costs or help a loved one get on the property ladder. There are, however, some factors that you should consider before committing to a contract and pitfalls you should avoid altogether.
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Contents
- What is an equity release scheme?
- What are the benefits of an equity release scheme?
- Who can apply for equity release?
- Do you qualify for equity release if you already have a mortgage?
- What are the pitfalls and risks of equity release?
- How much can you borrow through equity release schemes?
- How to find a good equity release deal
- Are equity release schemes right for you?
What is an equity release scheme?
Equity release refers to various types of schemes that allow individuals to borrow money against the value of their property. There are multiple types of equity release products you can choose from, each with its own benefit.
The two main types are lifetime mortgages and home reversions.
A lump sum lifetime mortgage, for example, allows you to receive the funds in one lump sum, whilst a drawdown lifetime mortgage allows you to release funds in short instalments over time. The amount you can borrow generally varies between 15% and 50% of the value of your property.
You may sell all or part of your property through a home reversion but continue to live there. Note that you won’t get a full price for your property through this option, so make sure to check all your options before deciding.
What are the benefits of an equity release scheme?
The main benefit of these schemes is that it gives you instant access to cash in your later years, typically when you’re retired. These funds can be used as you please, as there are no restrictions on how you spend them. You can help cover medical expenses, your retirement costs, or even help a loved one onto the property ladder.
Who can apply for equity release?
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Not everyone can qualify for equity release; you must meet specific requirements, such as:
- For a lifetime mortgage, applicants need to be at least 55 years old, whilst for a home reversion scheme, you must be at least 65.
- The home which you plan to borrow against or sell must be your primary residence.
- The property must also pass an evaluation by the lender and be worth at least a specified minimum value.
Do you qualify for equity release if you already have a mortgage?
You can apply for equity release if you still have an outstanding balance to pay on your first mortgage. However, the lender will use the funds you release or gain from the sale of your property to cover the due amount.
This also means that if you still have a significant amount left to pay on the standard mortgage, you might not be approved for an equity release scheme.
What are the pitfalls and risks of equity release?
As you can see, there are plenty of benefits and excellent reasons to opt for equity release in the UK. The market value has grown by 32% in the first half of 2021, compared with the same period in 2020. However, there are some pitfalls to avoid and factors you should consider before making a decision.
Borrowing more than you need
It can be easy to take advantage of the maximum funds available to you, such as through an enhanced lifetime mortgage, and forget that you still have to pay the loan plus interest when you pass away. Make sure to calculate exactly how much you need to keep costs down.
You might lose benefits.
If you release a significant amount of funds, your income might surpass the UK retirement benefits threshold.
You opt for the wrong scheme.
You could make a wrong decision and choose a plan you can’t afford, such as a voluntary repayment plan where you need to pay the interest plus a portion of the loan each month. Some companies will allow you to switch to a different plan, but it’s always better to get it right the first time.
You will leave a much smaller inheritance.
One of the significant disadvantages of equity release is leaving a smaller inheritance for your loved ones, especially if you release 50% of the value of your property.
Early repayment fee
It’s normal if your circumstances change and you no longer need an equity release plan. However, the lender will apply an early repayment fee if you’d like to exit the scheme early. Depending on how far into the plan you got, the fee could be substantial and leave a large financial debt.
How much can you borrow through equity release schemes?
The amount you can release depends on which type of scheme you choose and the value of your property. If you opt for a home reversion plan, you could get up to 100% of the value of your property, whilst a lifetime mortgage can give you access to up to 50% of the value.
How much you want to borrow will also influence the interest rate you’ll pay on top of the loan. Contacting a professional advisor and using an online quote calculator to get an exact quote for your specific requirements is a great way to determine whether this is the right product for you.
How to find a good equity release deal
The best way to find a good deal is to ensure you research the market thoroughly and use a reputable broker. It would help if you also got quotes for yourself from various lenders to compare prices, as the first deal you’re offered isn’t necessarily always the best one.
Are equity release schemes right for you?
If you’re happy to increase the cost of your property mortgage to gain access to funds, then equity release schemes are an excellent option for you. You should discuss this with your family, especially if you have any dependents, since an equity release scheme only protects you as the homeowner. Once you pass away or go into full-time care, your dependents won’t be allowed to stay in the property.
On the other hand, you might find that an equity release scheme isn’t the most optimal way to get a loan and that a more traditional route is better.