Releasing money from your property can seem like the ideal solution as you get older and find yourself wanting extra income. It has proven particularly popular with retirees over the past few years with pensions declining in value in real terms. This is a major decision and one that should never be taken lightly, however, and this article aims to look at some of the pros and cons.
What is it?
Equity release involves selecting a product which enables you to release some funds from the value of your property. The equity is the amount left when you take away any mortgage still owed from your property’s market value. In simple terms, it is how much you would end up with if you sold up for cash.
You may be eligible to release a large proportion of this money if you have little or no mortgage left. One of the major benefits of this is releasing a large sum to spend whilst enabling you to still live in your property.
There are different ways to release equity. The two most popular methods are through a lifetime mortgage or home reversion. The former is the most commonly chosen method and means that you take out a mortgage that will be repaid when your home is sold, either because you move into a care facility or you die.
The ‘pro’ of this is that you can normally borrow between 18 per cent and half of your property’s overall value. In general, the amount goes up the older you are.
It must be remembered, however, that the amount you will owe will go up as interest is added, although you can sometimes pay off the interest to prevent it compounding. This is particularly important if you wish to leave some capital in the form of an inheritance.
The majority of equity release providers will not offer you a guarantee of no negative equity but you may still end up with nothing left of your property’s value after the mortgage is paid off.
With home reversion, your whole property or part of it is sold but you have the right to live there until you are no longer able to. The downside of this is that you will not get the full market value of your property and you may not be eligible unless you’re over 60.
Benefits and downsides
The major benefit is clearly the fact that you can release funds that would otherwise be tied up in your property without you having to move. The primary downside, however, is that you will not get the true market value for the property. This means you may not realise the full value of your investment and you will reduce any amount going to beneficiaries. If you’re in any doubt at all about any deals you are offered, make sure you get professional advice from a specialist such as https://www.parachutelaw.co.uk/equity-release Parachute Law.
Particular types of release schemes also have specific pitfalls. For example, with a lifetime mortgage, you could end up using up the whole value of your home to repay the loan as you end up paying interest on interest throughout the loan period. The practical effect of this is that if you were paying interest of around five percent and never paid any off, you would see your loan double every 15 years.
If you are worried about repaying any loan, help is available from organisations such as Citizens Advice
Is releasing equity a good idea?
The answer is very much a personal one and depends on your individual needs and circumstances.