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Is equity release suitable for you?

17th August 2018

Even if you don’t own your home outright, that does not mean that the proportion of your money tied up in it is worth nothing. Equity is the value of your property after deducting any mortgages or loans against it. For instance, if your home is worth £250,000 and you have a £200,000 mortgage, that’s £50,000 of equity that belongs to you. If you have no mortgage, you have access to 100% of your home’s equity.

Equity release is as it sounds, it is a process through which you are able to access the equity of your home without selling up. Equity release schemes are open to over 55s and come in two main varieties. In this article, we’ll be looking into the subject and providing you with equity release advice, exploring how equity release works, its benefits and whether or not it is a good idea.

 

How does equity release work?

For equity release to be an option for you, you must be over 55 with enough equity for you to borrow against. When it comes to settling on equity release, there are two options to choose from: a lifetime mortgage or a home reversion.

Taking out a lifetime mortgage is the more common of the two. This type of equity release involves taking out a mortgage on your property that is only paid on your death or until you are admitted into full-time care. Home reversion schemes are another method through which you can release equity in your home. Unlike a lifetime mortgage, you sell a portion of your home to a reversion provider who, upon your death and the sale of your property receives the profits from the portion of your home that was sold to them.

 

Is equity release a good idea?

Whether or not equity release is a good idea depends entirely on your situation and which route you decide to go down. It is important to consider the advantages and disadvantages of each route so that you are able to make an informed decision. Our below summary of each can help.

 

Lifetime mortgages

A lifetime mortgage is the most popular choice for the reason that you will be given access to a large amount of money without having to worry about interest payments. Your home has a no negative equity guarantee, meaning that even if the sale of your estate doesn’t cover the interest payments, no debt will be passed onto your surviving relatives. Plus, no matter what, you have the right to stay in the property until your death or until you move to permanent care.

Despite this, the interest rates for lifetime mortgages are often far higher than the average mortgage interest rate. After 10 years of borrowing a lifetime mortgage of £40,000 at the average lifetime mortgage rate of 6.9%, you will owe £80,000 when you die. Of course, borrowing against your estate means that, when you pass away, there could be very little to bequeath to your descendants. As such, it may be a good choice for you to avoid taking out a lump sum when choosing a lifetime mortgage. Rather than borrowing your home’s entire equity, see if a lender will allow you to take out smaller amounts as and when you need it. This can build up interest at a much slower rate.

 

Home reversion schemes

At first glance, home reversion schemes may seem like a far superior option. Selling portions of your home while continuing to live there and paying no interest sounds fantastic. However, there is quite a major drawback to these schemes.

When selling off parts of your property to a home reversion provider, you could get as little as 20% of the actual value of the property. For instance, if you sold 50% of your home to a provider, you could receive as little as 10% of your home’s actual value. Much like a lifetime mortgage, the selling of your property for less than average prices can negatively impact any inheritance you wish to pass down to your descendants.

 

Is there a better option?

Equity release is a useful way of acquiring money that’s tied up in your property quickly. But if you have any living relatives, it could seriously impact your estate and what you’re able to pass on to your relatives when you pass away. It may be better to consider downsizing your home instead. Many older people believe that they’re too old to move house. However, by downsizing you’ll be able to sell your home for its full value, are likely earn money from the sale and gain access to cash tied up in your property without getting into debt. You will also have reduced ongoing maintenance cost and responsibility.

For independent financial advice surrounding equity release or the implications of moving home, contact the friendly IMC financial services team today!

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