The pros and cons of equity release

Your home isn’t just a source of comfort, security and familiarity. It can also be a valuable source of retirement income, thanks to equity release.

When weighing up the advantages and disadvantages of equity release it’s important to understand the difference between the two types of equity release product.

lifetime mortgage is a loan taken out against your property. The loan, plus associated interest costs, are repaid when the property is sold. This is typically when you die or enter permanent care.

A less-popular form of equity release is a home reversion plan. This involves selling a portion of your home to a company. Just like a lifetime mortgage, you get to stay in your home until you die or go into permanent care.

Before considering the pros and cons of equity release you should consider whether downsizing is a better solution for you.

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Important: The loan amounts above are an illustration of the amount you could borrow. The actual amount may vary depending on your individual circumstances. The figures are not guaranteed and do not constitute an offer to lend. The loan amount will need to pay off any existing mortgage secured against the same property.

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Why is equity release so popular?

Given a surge in the number of us reaching retirement, it’s no surprise that equity release products are growing in popularity. Not only can they generate a reliable source of income while allowing you to maintain a comfortable lifestyle in your own home, they can also provide a one-off funding bump to perhaps pay off interest-only mortgages, pay for home improvements or even a dream holiday.

A growing number of parents are tapping into equity release to help their children onto the property ladder. They figure that offering a lump sum when they die, could come too late.

And the equity release market has grown up a lot in the past five years. Lending standards have improved and competition between providers has brought interest rates down.

Does equity release make sense for me?

Equity release isn’t usually suitable for property owners that have lots of spare cash. Or home owners with other investments like shares and bonds. Those assets can generate adequate income in their own right, lessening the need for a loan.

People wondering if they have enough to fund a comfortable retirement should consult a financial adviser, who can help evaluate if equity release is the right route.

Always talk to a qualified financial adviser when making these decisions. A professional will be able to help you understand whether equity release is right for you. Depending on your product and plan, equity release can be an expensive way to borrow.

 

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Could a lifetime mortgage wipe out my kids’ inheritance?

Be careful. Interest compounded over many years adds up. A rate of 5.5%, for example, compounded annually on a £100,000 lump sum would add interest costs over a ten-year period of around £71,000.

That could mean there’s not much value left in your home to pass on to loved ones. This could be exacerbated further if house prices stagnate or fall.

The good news is that reputable equity release products come with a “no negative equity guarantee”. That means, should house prices collapse or if the rolled-up interest is higher than the house price, your beneficiaries will never owe more than the value of the property.

There’s also an assortment of products to choose from that can help you reduce expenses. For example some allow you to repay 100% of the monthly interest on the loan for a period of your choice. It’s important to work with your financial adviser to find the right product and plan for your situation.

Interest on equity release

People who want to avoid interest costs entirely could opt for the route less-travelled: a home reversion plan. A downside here is that relatives won’t get to pocket any increase in the value of the portion of the home that was sold.

A lifetime mortgage is a loan, which comes with interest charges. How much interest, and whether you have to pay it or whether it is added to the loan depends on the specific product you go for.

There are a wide range of product options including ‘interest roll-up’, where the interest is added to the loan, and ‘interest payment’, which gives borrowers the option to pay off the interest each month to ensure the loan doesn’t grow.

Find out more about how much equity release costs.

Tax on equity release

The money you receive from equity release is tax-free, but could be subject to tax later if, for example, you put it into a savings account.

Equity release can have a positive impact on future tax obligations by reducing your Inheritance Tax bill.

As property prices have increased more and more people are hitting the inheritance tax threshold (£325,00 for individuals, £650,000 for couples), and paying 40% tax on everything above that threshold that they want to pass on to their children.

Equity release can reduce the value of your estate and could potentially reduce your inheritance tax liability.

How will equity release affect my pension benefits?

For those over 65, state pensions aren’t affected. Some means tested benefits may be affected, depending on your individual circumstances. It’s crucial to take a close look at what payments you’re receiving, or expect to receive, from the government. You should also consider how it could factor into your care plans.

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