Because living expenses and mortgage rates are rising, an increasing number of senior homeowners are obtaining equity release products.
The Equity Release Council (ERC) released new data showing that monthly market activity increased in May and then again in June. Additionally, according to ERC chair David Burrowes, “socio-economic factors” for releasing equity still exist even though market activity is down from a record high in 2022.
“People want to help themselves and their loved ones live more comfortable lives, and they are living longer and not saving enough for retirement,” he continued.
It can be difficult to navigate the world of financial options, particularly when making important choices like equity release. With the help of this thorough guide, you can better understand the nuances of equity release and decide if it’s a good fit for your financial objectives.
What is Equity Release?
Equity release is a financial product designed for homeowners aged 55 and above who have a significant amount of equity built up in their property. It allows you to access a portion of this equity as a tax-free lump sum or a series of smaller payments, without having to sell your home or move out.
How Does Equity Release Work?
There are two main types of equity release:
- Lifetime Mortgage: You borrow against the value of your home, and the loan is repaid, along with interest, when you die or move into long-term care.
- Home Reversion Plan: You sell a portion of your home to a provider in exchange for a lump sum or regular payments. You retain the right to live in your home for the rest of your life, but you will own a smaller share of the property.
Is Equity Release Right for You?
Deciding whether equity release is the right choice for you depends on your individual circumstances and financial goals. Here are some key factors to consider:
- Your age and health: Equity release is typically available to homeowners aged 55 and above. Your health and life expectancy can also influence the terms and costs of the product.
- The amount of equity you have in your home: The more equity you have, the more money you can access through equity release.
- Your financial needs: Equity release can be used for various purposes, such as home improvements, debt consolidation, or supplementing your retirement income.
- The interest rates and fees involved: Equity release products typically come with higher interest rates and fees compared to traditional mortgages.
- The impact on inheritance: Equity release can reduce the amount of inheritance you leave behind.
Benefits of Equity Release:
- Access to a large sum of money without selling your home: Equity release allows you to tap into the value of your home without having to move out.
- Tax-free cash: The money you receive from equity release is tax-free.
- Flexibility in how you use the funds: You can use the money for any purpose you choose, such as home improvements, debt consolidation, or travel.
- No monthly repayments: With a lifetime mortgage, you don’t have to make any monthly repayments until you die or move into long-term care.
Drawbacks of Equity Release:
- High interest rates and fees: Equity release products typically come with higher interest rates and fees compared to traditional mortgages.
- Reduced inheritance: Equity release can reduce the amount of inheritance you leave behind.
- Potential for negative equity: If property prices fall, you could end up owing more than the value of your home.
- Impact on future borrowing: Equity release can make it more difficult to obtain other loans in the future.
Alternatives to Equity Release:
- Downsizing: Selling your current home and buying a smaller, less expensive property can free up equity that you can use for other purposes.
- Remortgaging: If you have a significant amount of equity in your home, you may be able to remortgage to access additional funds.
- Taking out a personal loan: A personal loan can be a good option if you need a smaller amount of money and have a good credit history.
Making an Informed Decision:
Prior to deciding on equity release, it’s important to weigh your options and consult a professional. You can evaluate your financial status and decide if equity release is the best option for you with the assistance of an independent financial advisor.
Equity release can be a valuable financial tool for homeowners who want to access the value of their property without selling their home. However, it’s important to weigh the pros and cons carefully and make an informed decision based on your individual circumstances. By understanding the different aspects of equity release, you can determine if it aligns with your financial goals and aspirations.
What is equity release?
Unbiased stated that many “homeowners’ wealth is sunk into their property” as a result of decades of rising housing prices, making it “inaccessible.”
Equity release enables elderly homeowners to take advantage of cash flow from their home without having to sell.
According to Compare the Market, the homeowner must be over 55, “and if you’re borrowing jointly you both need to be over” this minimum age. “Until the last homeowner in the property dies or goes into long-term residential care,” the loan and interest are not repaid.
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However, releasing equity is “a big financial commitment”, said Compare the Market, so “think carefully about its implications”.
All You Need to Know About Equity Release Schemes | This Morning
FAQ
What is the downside of equity release?
Is there a catch to equity release?
What is the downside of taking equity out of your home?
Why would you release equity?
Is equity release a good way to release money?
Also known as a lifetime mortgage, equity release is way for homeowners over 55 to release money from their property. Photo: Toby Melville/Reuters Equity release can be a great way to release cash from your home but the pros and cons need to be carefully weighed up.
What is equity release?
Equity release is a way to unlock the value of your property and turn it into cash. You can do this via a number of policies which let you access – or ‘release’ – the equity (cash) tied up in your home, if you’re 55+. You don’t need to have fully paid off your mortgage to do this.
Is equity release right for You?
Equity release is not for everyone. The cheapest way to release the value in your property is to sell it and downsize to a smaller property – or move to a cheaper area. But many people don’t want to leave the family home, which is where equity release can be a good alternative.
Can I release equity from my home?
If you’re looking to release equity from your home there’s a few things that determine if you’re suitable and how much you can borrow. Your age, health and the value of your property will all have an impact. You need to be over 55 to qualify for a Lifetime Mortgage and over 65 for Home Reversion.