Pros and Cons: Will Equity Release Be Good For Me?
Equity release is a way of spending your house value in the form of loan, while still living in the property, by selling a portion of the house, or borrowing against its value. It could also be argued to be the easiest way to retain the use of your house, which has a certain amount of monetary value tied up in it, while obtaining a good amount of money, either as a huge sum of cash, or as a steady monthly income, using the value of the house. Equity release is usually granted to persons that are 55 years old and above, for any period of time the person may wish. This service is offered by major insurance companies through professional independent financial advisers, who give sound advice on how to go about your future finances and investments.
Types of Equity Release
Life Time Mortgage: This form of equity release allows a person to take a loan against his or her house, for up to 50% of the possible monetary value of the house. The loan taken, plus accumulated interest costs, are later repaid when the house is finally sold, either when the house owner dies or when the person moves to a long-term care facility.
Home Reversion Scheme: This is another form of equity release, where a house owner decides to sell the whole house or a portion of the house to a reversion company, in exchange for a tax-free lump sum, or a regular monthly payment. The reversion company allows the person to continue living in the house until death.
Equity release is very advantageous as it allows the aged person to continue living the normal and comfortable lifestyle that they accustomed to, even after retirement, and still generates a good sum of income. It also offers a one-off funding sum that helps the people to pay for other interest-related mortgages, and to do any other thing they may wish.
Equity release product is not really necessary for everyone, especially landowners who already have adequate cash at their disposal to take care of themselves and their family in their old age and after retirement, or house owners that have enough investments such as shares, bonds, stocks, and other assets which can easily provide adequate income for their owner, thereby reducing the need to get a loan. As good as equity release may sound or look, it has its own pros and cons, just like any other investment product. In order to avoid any mistakes or regrets in the future, it is usually advisable to seek the advice of a professional financial adviser before venturing into getting an equity release.
Pros of Equity Release
- A lifetime equity release allows the aged people to continue staying in their beloved home when it seems their source of income is minimized as a result of retirement. This puts out the choice of selling the house entirely and moving to a smaller, cheaper property, which could be really stressful and unpleasant for an aged person.
- No monthly or regular payment of the interest rate is required, as the policy of equity release does not expect you to pay back the loan from your present income. The interest over the years, depending on the period of time, accumulates and is paid off when the house has been sold.
- Equity release gives you the perfect option of taking out the loan either as a lump sum or as a part payment, and doing whatever you like with the money. You could decide to use the money to redecorate your house as you have always wished, or go for that long holiday that you have waited for all your life.
- Loans from equity release could serve as a source of finance when you need money urgently. It can provide you with a source of dependable revenue in times of financial distress.
- Equity release providers offer a no negative equity guarantee, which ensures that your dependents or relatives are only required to pay back your loan as a fixed amount of money that cannot be above the market value of the house. If the market value for the house reduces, the equity release providers will have to bear the loss, but if the market prices increase, your dependents will have the advantage of taking back the extra cash anytime they want.
- Equity release is a highly regulated financial product where the trade industry body called ERC and FCA sets equity release terms and conditions in order to suit the customer nicely. Due these terms and conditions, negotiation of interest rates are made simple, and with the help of a financial adviser, you can easily get a good interest rate for your house for any period of time you may desire.
- Some life mortgage products and plans allow you to make interest payments regularly, such as monthly if you prefer, instead of allowing the whole year’s interest to add up. This type of plan helps you to reduce the effect of the blow the interest rates will impact on your estate property, thereby increasing the amount of heritable money for your dependents.
- Some equity release plans also allow the release of funds on a regular basis, such as monthly, depending on the person’s wish, instead of taking the agreed loan all at once. This helps to shrink the overall cost of interest that would have been accumulated over the years. This is pretty much the only way to reduce the costs of interest in equity release.
Cons of Equity Release
- The interest rate for an equity release is normally higher than the regular residential mortgage. This simply means that the higher the loan that is taken, the more interest you have to pay back, which this could amount into a rather large sum at the end of a particular period of time. This means that it is important to have a proper study of the total cost to pay back, rather than looking at only the interest rate before making a decision.
- Most of the time, when the house is sold in order to repay the debt, it affects the normal inheritance of your children and other relatives, because the net monetary value of the house has already been reduced to its barest minimum.
- Relatives or your children living in the house after you are dead or have moved to a permanent care home could be a problem if the arrangement wasn’t included in the terms and conditions of the equity release provider. You wouldn’t want to find out that your dependents will not be able to inherit your house after you have passed on just because you didn’t look into all the necessary requirements properly.
- Sometimes equity release agreements may affect some the social security benefits you should get when you reach your pension age. These benefits include pension credit for lower income earners, council tax benefits, and a lot more could be lost if proper research is not made.
- Sometimes early payment issues may arise, where you will be expected to repay the loans and the interest rate incurred earlier than expected. This situation could prove to be difficult, especially if the issue is not raised at an early stage.
- In a reversion plan, if there is an increase in the price of the portion of the house that has been sold, the extra money is not returned to the dependents of the house owner.
If you are confused in any way as to whether or not you will still be able to afford a comfortable life with the same standard of living you are used to even after retirement and your source of income becomes lower, you are expected to consult with a qualified financial adviser, who will be able to help you to understand if equity release will be beneficiary to you, or if will it just be too expensive, or even unnecessary. Equity release can be a simple and expensive way of borrowing, depending on the equity release product and plan that you decide to use. Do thorough proper research with the help of your financial adviser to ensure that the company that provides you with the equity release product is a member of the Equity Release Counsel [formerly known as SHIP]. This equity release trade body ensures that you do not owe more than the worth of your house, and that your dependents do not have to worry about repaying a loan that is more than the worth of your home. You could also decide to save more money and therefore reduce the interest rate by taking half of the loan you want initially and investing it for profit. This reduces the total interest rate that could have accumulated, and it also keeps you safer in case you decide you need more money later, for long time care. It also helps to reduce the impact of the loan on your estate.