Mention the words ‘equity release’ and you might automatically assume it’s something to be avoided. In recent years, there has been much negativity surrounding the scheme and whether it is a safe option for property owners looking to free up funds in later life, with many homeowners reporting they ended up owing thousands of pounds more than their original borrowings. However, in the right circumstances, and with the right advice, equity release can provide flexibility and a variety of benefits, including enabling family members to avoid paying out costly inheritance tax charges.
Here, Michael Usher – owner of Michael Usher Mortgage Services – explains the benefits of equity release and how to avoid the potential pitfalls.
What is equity release?
Equity release allows homeowners who are 55 years and over to benefit from either a lump sum of cash, or regular cash payments, based on the equity available in their main residence with the advantage that they can continue living in the property. Basically, it’s a type of mortgage agreement that allows property owners who might need to free up some cash to use the value of their home to raise funds.
You can access equity release whether you own your property outright or are still paying for it on an existing mortgage. This means it’s an option for those who are asset rich, but cash poor who still want to remain in their existing property.
What types of equity release are available?
There are two types of equity release – lifetime mortgages and home reversion.
Lifetime mortgages are the most popular and allow homeowners to take out a mortgage on their property so long as it’s their main residence. Some of the equity can be ring-fenced as an inheritance for your family. Repayments don’t have to be made while you’re alive, however unpaid interest is added to the loan meaning the debt can increase quite quickly over time. Alternatively, there are some available that allow you to pay off all or some of the interest or all the interest and capital. These ‘drawdown’ mortgages enable borrowers to take a bit of money out of their property at a time.
Home reversion plans will pay you a tax-free lump sum for a share of your home, enabling you to live in it until you die without having to pay rent. However, what you owe when the property is sold will be based on the percentage share the lender owns rather than the amount you borrowed. Therefore, if your property increases significantly in value, you could end up paying out thousands more than you originally borrowed as the lender will take a percentage of the total proceeds. For example, for borrowings of £50,000 for a 30% share in a property currently worth £300,000, if it is eventually sold for £500,000, then you would owe £150,000 – a 30% share of the proceeds. This could be hugely costly if property prices were to dramatically increase between the original valuation and the time when the loan is paid off.
What are the benefits of equity release?
Equity release enables you to access lump sums of cash without selling your property, allowing you to:
- Pay off debts
- Enjoy a more comfortable retirement
- Make home improvements
- Help family members with large purchases, such as a deposit for their first home
- Access funds which are tax free
However, there are disadvantages to equity release and it may not always be a suitable choice compared to downsizing. Therefore, you should consider your options carefully before making any commitments.
Is equity release right for me?
Before signing on the dotted line, you should seek the advice of a qualified professional, such as an independent mortgage broker or financial adviser specialising in equity release. Always ensure you use a company that’s a member of the Equity Release Council – its members are regulated and must adhere to the ‘no negative equity’ guarantee ensuring you will never end up owing more than your home is worth.