It’s never too early to think about later life – retirement is a crucial goal for most people, and neglecting to prepare for it can have disastrous consequences for your sunset years.
With many people having had to put their retirement savings on hold in response to the COVID-19 pandemic, the prospect of preparing for your future while weathering the present might be difficult to stomach – but there is a potential solution, in the form of equity release.
Here’s our guide on the pros and cons, risks and pitfalls, to help you find out if equity release is a good idea and is safe for you.
What is Equity Release?
Equity release is, simply enough, the release of your equity. The most common form of equity release is something called a ‘lifetime mortgage’: a loan taken out against your property and paid to you in a lump sum or installments, which can either be paid back gradually or on the sale of your home either after your death or when you enter long-term care.
In real terms, you can think of it as ‘releasing’ the equity – that is, the market value after your outstanding mortgage or secured debts – of your home well before you sell it, for a small fee.
The Advantages of Equity Release
The significant advantage of opting for an equity release is its flexibility. Often with loans, you’ll be used to the idea of regular repayments and penalties for missing payments; with equity release, it is entirely up to you when – or indeed, if at all – you make any payments.
The loan is secured against your home, and the provider is guaranteed to collect the loan’s value, meaning less pressure for you.
Another significant advantage is that your home remains yours until you no longer need it. This means you can enjoy the rest of your life in the comfort of your own home at your own pace, with the equity from it available for you to spend immediately.
An often-overlooked advantage of equity release lies in the potential reduction of your estate’s value.
With a decrease in the value of your property – as a lifetime mortgage secured against your property is viewed as a debt – you could fall below a crucial Inheritance Tax threshold, enabling you to leave more to your loved ones.
The Disadvantages of Equity Release
Unfortunately, equity release does come with its disadvantages, chiefly, the compound interest rate. Compound interest has the effect of ‘rolling-up over time, meaning your debt can balloon very quickly.
Some lenders offer the option of paying off the interest before it drastically affects what you owe, but it is nonetheless something to be aware of.
Another con is the potential effect releasing equity could have on any benefits you may receive. The money you have directly available can make you ineligible for certain means-tested state benefits such as council tax benefit or pension credit.
Lastly, you will not be able to leave your home to your loved ones in your will. The house will likely be sold to pay off any remaining debts, with the remaining sum available to your family as inheritance.
The Equity Release Council was set up to protect people from losing out from these schemes. Make sure you can still live in your home until you die or move into permanent care.
Also, you must ensure that you will never owe them more than the total sale price of your home, even if its value drops. You also have the right to ask a solicitor to check all the documents before signing up for a scheme.