Equity release has become an increasingly popular way for people over 55 to release money that is tied up in their homes. With high living costs and the ageing population, there is a huge demand for seniors who need extra finance to top up their pension, pay for bills and continue to enjoy their lifestyles.
Available from some banks and personal providers, your parents or grandparents can essentially borrow 20% to 60% of the value of their home and receive this in one large cash sum, which is tax-free. You also have the benefit of being able to live in your home until you die or go into long-term care, with options to put money aside as inheritance and for your beneficiaries to inherit your home too.
Equity release is broadly available in two forms: firstly as a lifetime mortgage which acts as a mortgage that accrues interest each month until you die. The second is as a home reversion scheme where you physically sell off a stake in your home. So if your home is worth £500,000, you can sell off 50% of it and receive £250,000 upfront, in theory, although this is likely to be undervalued.
So Is It Safe To Use?
Yes, equity release is indeed safe to use, confirms price comparison site Lending Expert. It is regulated by the FCA and the Equity Release Council oversees the industry to maintain high standards. One of the most important rules is a no negative equity guarantee, which means that your home should cover the cost of your equity release loan, so your family will not be left with any debt when you pass away or go into care.
If you have reservations, you can always speak to a financial advisor for professional guidance and how to structure your finances as effectively as possible.
What Else Do I Need to Consider?
Equity release is not exactly cheap, with rates starting at around 3% per month – and this can add up if you end up living for another 10, 20 or 30 years. Your repayments are often rolled up into the end of the loan term, and then it is repaid in full when your estate is sold. So at least you do not feel the financial burden initially.
So one concern is that the interest can eat away at your other savings and any potential money you want to leave aside for your children as inheritance. But there are ways around this. You can look at only drawing down a small amount, so the interest is reduced overall. Or you can look at selling your property and downsizing in a few years time to clear the loan in full.
There are over 100 different equity release options available, so there are different and flexible ways to put money aside for inheritance, or if you are planning to move home again. One of the popular options is to use a drawdown lifetime mortgage where you can draw down funds every now and again and only pay interest on what you use, so it is more cost effective.
Finally if you are planning to use equity release to gift money to your children, this can be completely tax-free, provided that you do not pass away within 7 years of giving the funds to them.