Equity release can be the right solution for some older people who are looking for a cash lump sum or extra regular income, but who don’t want to move to a smaller, less expensive property.
However, there are a number of potential pitfalls and issues to be aware of if you are thinking of taking out an equity release deal.
Mounting interest bills
If you take out the most common type of equity release deal, known as a lifetime mortgage, you borrow money against the value of your home at a certain rate of interest, which is normally fixed for the full term of the plan.
The capital and interest is only repaid at the end of the scheme, when you die or move into long-term care.
This means, however, that interest charges can mount up quickly: if you live for a long time after taking out your plan, your total debt could eventually exceed the value of your home.
However, bear in mind that reputable providers should offer a no negative-equity guarantee, which means you or your family will not have to repay more than the property is worth when the scheme ends.
It is also worth noting that there are plans available which allow you to repay interest on the loan on a monthly basis, which will mean the amount owing at the end of the plan will just be the amount borrowed.
Missing out on house-price rises
Another type of equity release plan, home reversion, involves you selling a share in your home to a provider in return for a cash lump sum and the right to remain living there.
When the property is eventually sold, the provider gets its share of the proceeds.
What this means, however, is that you or your family will not benefit from any rises in value on that share – so if you were to sell a 40% stake in your home to an equity release provider, you would only see 60% of any future house-price increases.
Limits on the amount you can release
While you might have a considerable amount of equity in your home at present, the amount you can release could be substantially less.
Equity release providers typically have to wait many years before they are repaid, and as a result the “discounts” they apply to the amount available can be large.
Generally, the younger you are and the better your state of health when you sign up, the less equity you will be able to unlock.
Look at the alternatives
If you need extra money in retirement, equity release might be an appealing option, but it is worth considering the alternatives given the fact that interest charges can be high or you might have to give up some ownership.
You might be able to downsize to a smaller property or borrow money in another way – family members may even be willing to help you out given the potential impact equity release could have on their inheritance.
A good equity release adviser will discuss the alternatives with you and only recommend equity release if it is the most suitable option based on your personal circumstances.
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Get the right advice
Ensure that you are getting impartial specialist advice about whether equity release is suitable for you, and what other options are available. You can search for a local adviser who is a member of the Equity Release Council here.
I’m considering an equity- release scheme and have been told I should be able to raise more money due to my poor state of health. Is that true?
If you’re considering raising cash in retirement against your property using equity release, you also have a clear financial incentive to disclose any health issues, as you could generate more money from an ‘impaired life’ scheme.
According to brokers Key Retirement, a 70-year-old who owned a property worth £300,000 could typically generate a maximum £128,395 from a standard plan if they were in a reasonable state of health. But if they smoked, were overweight and had high blood pressure, they could get £142,595, or £14,200 more.
When you take out an equity-release plan, also called a lifetime mortgage, the interest typically rolls up and is repaid along with the original capital when you die or go into care. The shorter your life expectancy, the sooner the company can expect to get its money, allowing it to offer you better terms.
There are few times when poor health works to your advantage, but this is one.
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