Equity release enables you to release money from your house without selling it. It’s like a mortgage, but normally, you don’t make any repayments. Typically equity release products are available to homeowners over the age of 55. They are often used to supplement pension income or meet an unexpected expense. As with any financial product, there are risks involved. That’s why it’s important to understand whether it’s right for you before signing on the dotted line.
What are the advantages of equity release?
The advantages are:-
- You can release money to improve your quality of life without having to sell your house.
- You can continue to live in your house.
- It can be tailored to fit your budget: whether you make any repayments to the lender is usually a matter for you. You can decide to pay nothing, interest only, or a portion of the interest which would normally be repayable.
- Equity release loans generally allow you to draw down an initial advance and further advances in the future up to pre-agreed limits.
How does equity release work?
Any unpaid interest is added to the original amount borrowed and is paid off along with the original advance when the equity release comes to an end. This can be when you sell your house, or move into a care home, or on your death.
Sometimes it’s possible to transfer your equity release mortgage to a new property. This will depend on the lender and the type of property you are moving to.
Are there any disadvantages?
Although an equity release mortgage sounds attractive, it has some disadvantages:-
- If you don’t pay the full amount of interest due on the initial advance, the unpaid interest is added to the outstanding debt on a compound basis. This means that the amount of debt secured over your property can go up quite quickly.
- An easy way to find out how long it will take for the original sum borrowed to double is to divide 72 by the rate of interest you are paying. This will tell you how many years it will take for the debt to double. So if you borrow £20,000 and your interest rate is 6%, after 12 years, the debt would have grown to £40,000.
- To keep the amount of debt secured over your house to a minimum, you should only borrow what you need. Do not draw down money “for a rainy day” and put it aside. If you do, you will end up paying compound interest on the rainy day money.
- If you receive state benefits, you should make sure that obtaining a release equity loan will not mean a reduction in your benefits.
- The interest accruing on the debt eats into the remaining equity in your property. This can result in less money for your beneficiaries on your death. On the other hand, if your property value increases faster than the debt is accruing, you might still end up leaving more money to your relatives.
How do I know if it’s right for me?
The Equity Release Council advises that you should take independent financial advice to help you to understand what is involved and discuss your options. This advice can also cover the potential impact on state benefits and tax, as well as outlining the benefits.
In addition, you should take independent legal advice before committing yourself to an equity release contract. This advice will help you understand the long-term nature of such a contract.
Taking independent advice will help you to make a fully informed decision. And it will allow you to be confident you are doing the right thing for your circumstances.
What else should I consider?
Downsizing is usually a more economical way of releasing equity from your home, and you should always consider this as an option. If this isn’t possible or you do not want to, equity release can provide the answer. The older you are when you take out an equity release loan generally means that there are less years for interest to accrue before the loan is ultimately paid off.
Whether equity release is right for you depends on a lot of factors. If you would like to find out more, our Property Team can put you in touch with a suitable advisor. If you need independent legal advice on an equity release contract contact us today.
The content of this page is for information only. It is not intended to be construed as legal advice and should not be treated as a substitute for specific advice. Gibson Kerr Ltd accepts no responsibility for the content of any third party website to which this webpage refers. Gibson Kerr Ltd is regulated by the Law Society of Scotland.