With retirement approaching, equity release is a great way to fund the big changes in your lifestyle. But what exactly is it and what are the pros and cons of equity release?
What is equity release?
Equity release loans let homeowners over the age of 55 take value out of their home. The loan can either be taken out in a lump sum or in smaller regular payments. These types of loans can be a useful way to clear outstanding debts and stabilise your financial situation for retirement.
Essentially, equity release loans work like a long-term loan that is repaid with the sale of your home after your passing. You may want to consider equity release to give yourself a little more financial freedom. Whether you’re planning to renovate your home or helping loved ones plan for their future, equity release is designed to give you that peace of mind.
There are many equity release loan products on the market, and a number of pros and cons of each to be aware of. Before considering releasing equity from your home, it’s always best to seek independent financial advice.
Types of equity release
There are two main types of equity release.
Lifetime mortgages are loans which use your home as security. The difference is that you don’t make repayments. The loan amount gathers interest and is typically paid back by your descendants when you pass away, decide to move home or go into long term care.
With home reversion, you sell some of or all of your home to a provider who pays you a lump sum or regular smaller amounts in return. You keep the right to live in your home for life, but you must maintain and insure it. The proceeds of the home, once sold, are then split between your lender and you or your estate based on the percentage of the property you each own.
Pros and cons of equity release
Lifetime mortgages vary widely in the amount you can borrow, and all of them may have a much higher equity release loan interest rate than the ‘average’ mortgage. If you go for a home reversion product, you should find out first what the conditions are – for instance, how often your home will be inspected to see if you’re maintaining it as required.
For those who have property under the inheritance tax threshold, releasing home equity comes with a much louder note of caution. Reducing the equity in your home may give you less freedom in later life. If you borrow too much, or at too high an interest rate, there’s a risk that you won’t have enough equity to downsize if you want to, or to pay for nursing care if you need it in later life.
How much does equity release cost?
The cost of equity release and its interest rates depends on the type of equity release you are interested in and will depend on your circumstances at the time of borrowing. However, if you don’t make monthly repayments to reduce the overall debt, the overall amount will increase over time. This means there will be a large sum to pay at the end of the term, which can mean a large cost for either you, your children or your estate.
There are also arrangement fees to pay in the early stages of the equity release loan process. These depend on the type of equity release product taken.
Find out more about equity release with Norton Finance.