What do you do if you’re over the age of 55 and need to access the equity tied up in your home, but don’t want to move house? You can take out an equity release plan in the form of a lifetime mortgage or a home reversion. The money you release can be paid to you in small amounts over a set period, or paid in one lump sum – you can even choose to receive a combination of both.
However, before you forge ahead, Dakota Murphey takes a look at the advantages and disadvantages of an equity release plan to help you make a considered decision. Keeping up to date with the latest updates from various legal and news sites, including The Guardian and occasionally John Whyte Equity Release Sussex.
Advantages of Equity Release Plans
Whether you select a home reversion plan or a life mortgage, the big advantage is you can stay in your home. At the same time, you’ll be unlocking cash that can help bolster your pension income. The plan will provide you with tax-free cash, so you can be financially secure throughout your retirement.
You’re not required to make monthly payments. All home reversion plans and most lifetime mortgages will have little or no impact on your budget because you’re not required to make monthly payments towards the interest the provider charges. You don’t have to repay any money unlocked by an equity release or home reversion plan, or any interest, until you have to move into long-term care or you pass away.
Aside from the set-up costs, an equity release plan won’t cost you a thing. Your equity release plan funds can be used in whatever way you like. You could use a portion to make some home improvements so your property remains in great shape, or you might put the money into your savings account as a way to boost your pension income. Some providers offer a ‘drawdown’ service, which means cash is released as and when you need it. As interest is charged on those funds that have been released, you’ll save on the amount of interest charged.
Importantly, lifetime mortgage and home reversion plans have very sound consumer protection. These financial products are strictly regulated by the Equity Release Council (ERC) – the industry trade body that sets equity release standards – and the Financial Conduct Authority (FCA) – the body responsible for the regulation of these standards.
In terms of ERC rules, you have the right to remain in your home. This means you can live rent free for the rest of your life. In addition, this will continue until the last person in your home has passed away or moved into long-term care. You can also benefit from a ‘no negative equity guarantee’ offered by most providers. This ensures that no matter what happens you’ll never end up owing more than the value of your property.
Disadvantages of Equity Release Plans
Interest charges mount up very quickly – the longer you borrow money through a lifetime mortgage or a home reversion plan, the longer the interest charges have to accumulate. At the end of the plan this could mean that you or your family might owe your provider the full value of your home. (This is why a ‘no negative equity guarantee’ is so important.)
Your family will receive a smaller inheritance. If you take out an equity release plan, part of the value of your home has to go to repay the provider when you move into care or pass away. Effectively, this means your relatives will receive a smaller inheritance.
You won’t benefit from a rise in house-prices. Taking out a home reversion plan means that you’ll have sold a portion of your home to your provider. If house prices rise, you and your family will not benefit from the rise on the portion of your property that you’ve already sold to your provider.
The value of your estate will be reduced. Equity release means that cash is taken out of your property and therefore the property’s net asset value is reduced. Your social security benefits could be affected. If the money from an equity release is used to increase savings, any pension credit and council tax benefits you receive may be reduced.
Set-up costs can be expensive. The fees you pay to set up an equity release can be pretty steep. You’ll be required to pay a valuation fee, your solicitor’s fees, and an application fee. All of these will reduce the final amount you receive.
You may have difficulty in re-mortgaging your property. If you’ve successfully taken out a lifetime mortgage or home reversion, then you’ve effectively taken out a loan on your property. This could be a problem if, in future, you want to raise additional finance.