Yahoo Finance Property: What is equity release and when should you use it?
Equity release can be a great way to release cash from your home but the pros and cons need to be carefully weighed up.
With interest rates low, now may be a good time to consider whether it is a viable option. The lowest rates are currently 2.75%, compared with 3.4% just two years ago.
"There is a stigma attached to equity release but for the right person it gives a better quality of life and they can enjoy retirement better," said Dan Walker, financial planner at Seed Financial Planning.
"Each customer is different. Everyone who does this needs to get independent advice. If it is not for someone now, it could be in 15 years," he added.
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What is equity release?
Also known as a lifetime mortgage, equity release is a way for homeowners over 55 to release money from their property. You can normally borrow up to 60% of the property's value on a fixed interest rate.
The debt is paid from the estate when the borrower dies or moves into long-term care.
The money can be drawn down as a lump sum as and when it is needed, meaning less interest is added to the loan. It can also be paid out as a regular income.
The loan can be used for any reasonable and legal purpose but is most commonly used for property renovation, clearing debts, holidays, early inheritance to reduce inheritance tax or an income boost in retirement.
This equity release calculator can estimate how much you can raise from your property.
Advantages
There are no monthly repayments to make because the loan is repaid from the sale of your property when you move into permanent care or pass away. There are interest-only plans available if you want to make some repayments and reduce the balance that your estate will owe at the end of the term.
The money released is tax-free although there are set-up costs.
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A major benefit of equity release is that it provides an alternative to downsizing, enabling you to carry on living in your home.
Any lender that is a member of the Equity Release Council has to provide a "no negative equity guarantee". This means that if the value of your property dropped after taking out an equity release facility and you wound up owing more than your property is worth, the lender will write off the amount over the property value.
Disadvantages
It may be more difficult to move after taking out equity release as the new property would have to meet the lifetime mortgage lending criteria and additional checks would need to be carried out.
As the loan is repaid when your property is sold after you pass away or move into care, this will reduce the value of your estate and therefore the amount you have to leave your beneficiaries. This is something you need to consider carefully if the legacy you leave behind is important to you.
Taking out equity release may affect your entitlement to certain means-tested benefits.
"Equity release should really be the last option because interest is rolled up, and therefore the debt can increase quickly. For example, a loan of £50,000 at an interest rate of 2.75% means the total debt would be £86,021 after 20 years," explained Katie Brain, consumer banking expert at Defaqto.