30 Dec is equity release a bad idea
Equity release is an advised financial product, which simply means that you cannot take out a plan without having taken appropriate financial advice from a suitably qualified professional. Is equity release a bad idea? This can enable you to borrow more, or to pay lower interest. Read on to find out more about these different types of equity release. However, this could still mean that all the property’s value is used up in paying off the mortgage. Find the right adviser fast with our matching technology. Equity release squares the circle, by turning all that spare equity into cash that they can spend today. Equity release could be a good idea if you want to unlock tax free cash from your home, without having to move house or worry about monthly repayments. This is achieved either using a type of mortgage, or by selling that portion of your home on the condition that you can continue to live there as long as you wish. Equity release won’t necessarily be a good idea for everyone, but for some people, it can be an effective way to unlock cash they have tied up in their property. At heart, equity release is actually a clever idea. EQUITY release schemes were today labelled 'the lifestyle dream that can turn into a nightmare'. The amount of equity you can release depends on your property value and any outstanding mortgage or debt. The latest industry data shows that for every £1 of savings withdrawn via flexible pension payments in the last year, 50p of housing wealth was unlocked via equity release – up from 40p in 2016. The money can be paid to you either as a lump sum or as a regular income, whichever you prefer. The home will also have to be vacated very quickly after your death, often within a month. No other loans can be taken using the property as security. If you have paid off most or all of your existing mortgage, you can consider an equity release scheme. Interest rates can be as low as 3.4pc and are usually fixed for the life of the loan. It is important to check the terms and conditions before taking out the plan. Costs can include: These costs can vary, but you should allow for around £3,000. How we can help you with your Equity Release. You’ll have to tell your equity release company so that they can decide if your new home is similar in value. You will receive far less money than you would from selling the property on the open market – although of course in that situation you would still have to find somewhere else to live. Your financial adviser or mortgage adviser can help you decide whether an equity release scheme is appropriate, or whether you should consider other options such as downsizing instead. The UK’s long rise in house prices means that a large proportion of homeowners’ wealth is sunk into their property, and is therefore inaccessible. All reputable providers are members of the ERC, and all members must adhere to an official Statement of Principles that defines the ERC’s purpose. For example, borrow £20,000 aged 65 at 6.5% on a £120,000 home and live 25 … If your home has increased in value over the years, equity release enables you to get at some of that money to supplement your retirement income – instead of leaving it all to your beneficiaries, or to cover your long-term care costs. The early repayment penalties can be as high as 25pc of the initial borrowing. If you do want or need some extra money around the place and you don’t want to leave your property intact to your beneficiaries, then equity release is a good idea. Am I protected when using equity release? Find the right adviser fast with our matching technology. Use an accredited provider All equity release products are authorised and regulated by the Financial Conduct Authority. In recent years, there have been a number of changes to many equity release products to provide greater Total lending also increased from £385.7m to £446.2m. Here's our guide on the pros and cons, risks and pitfalls, to help you answer the vital questions, is equity release a good idea or even safe? Make sure the provider you use belongs to the Equity Release Council, so you are protected from pitfalls like negative equity. The amount you can borrow is usually between 18 per cent and 50 per cent of the property’s total value – typically the older you are, the more you can release. So, to get a better idea if equity release is for you, we’d suggest you have a friendly chat with one of the equity release experts we work with. Telegraph Money asked Alan Lakey, an independent financial expert who advises on equity release, for guidance on the good and bad. This is a major decision, so should never be taken without independent professional advice. And in the first six months of this year that rose to 31%. The choices open to homeowners are certainly growing. This means that the advice we offer is unbiased. In recent years, there have been a number of changes to many equity release products to provide greater flexibility and enhance the protection they provide. Is equity release a good or bad idea? Just 24 product options existed in 2007. Let us match you to your perfect financial adviser. If you do want to leave your property, then there may be alternative ways to raise the money you require. Look at alternative sources of income, such as downsizing or renting out a room. Ask both a financial adviser and a solicitor to study the contract for you to ensure that it is in your best interests. And where can I find unbiased equity release advice that I can trust? The "facility" option allows borrowers to have access to a pot of money for the future and are not charged interest until it is drawn upon. Another option is to take out a series of smaller lifetime mortgages over the years. This can be a large additional stress on your family, having to sort through your things and clear out the property in addition to arranging your funeral. These changes mean that Equity Release could now be a realistic element of your Retirement Planning. Read our community guidelines in full. 3. The amount you owe will grow with interest, but you can sometimes reduce this by paying off the interest as you go, so it doesn’t compound (this is known as an ‘interest paying mortgage’). This is because a lifetime mortgage (like a regular mortgage) charges compound interest. The reverse mortgage is a form of equity release that is available in Australia, Canada, the United States and the United Kingdom. Martin Lewis explains what equity release is and how it might help your finances. However, there are downsides to accessing the value of your home in this way. Unlocking the wealth in bricks and mortar can make sense, but it is not a decision to be taken lightly. Some reasons to consider it include: Some reasons to choose an alternative to equity release include: The minimum age for taking out a lifetime mortgage is usually 55. However, in as much as it can be an excellent option, it has some limitations & pitfalls. Unlocking equity from your home can be a great way to get some extra cash in retirement. The Equity Release Council was set up to protect people from losing out from these schemes. An equity release provider will provide you with either a lump sum or an income in exchange for part of the value of your home. Equity release interest charges: how much will my loan really cost me? Just 13% of those who supported a client with a lifetime mortgage purchase in the last year say they presented the idea to their clients, whereas nearly two thirds (64%) said their clients came to them with the idea. Even better, go over all your future plans with your adviser at the start, so you’re less likely to change your mind. Your equity is the total market value of your home, minus any mortgage you haven’t yet paid off. Generally, the older you are when you take out the scheme, the more money you’ll get. You will receive far less money than you would from selling the property on the open market – although of course in that situation you would still have to find somewhere else to live. Because who’d willingly want to make a non-informed financial decision based on their biggest asset that takes decades to pay off? This is the most popular type of equity release. This means that if the worst happened and the property value dipped below the amount owed, there is no loss to the borrower as the lender absorbs this risk and will not ask the borrower or their estate to meet any shortfall. They can give you unbiased advice on whether it really is the best option for you, and find you the best deal if so. We urge you to turn off your ad blocker for The Telegraph website so that you can continue to access our quality content in the future. People considering equity release must get professional financial advice beforehand. Borrow in stages Older homeowners warned over equity release advice costs, Overhaul for equity release after ‘lazy’ advisers accused of selling unsuitable loans, Equity release giant forced to ditch misleading ads after 'free advice' claim, Older homeowners are being failed by poor equity release advice, warns City watchdog, ‘Cocktail of dangers’ for older homeowners using equity release to help struggling families, 'Cheapest ever' equity release loans as demand for using houses like cash machines soars, The secret trick that can save retirees thousands, Age UK quits equity release after Telegraph investigation, Homeowners cash in as equity release rates fall below 5pc for first time, ‘My wife was 20 years my junior. We will look at all the financial solutions that are available to you, not just Equity Release. Be sure also to check out sovereignboss and see how much equity you can release with the equity release calculator. Try our calculator to find out", "See how much cash you could release from your home". Equity release is often the only method available for older people to extract funds from their property without downsizing or selling. Equity release is a way of freeing up the money in your home without having to move. Whether it’s a good idea or not, depends on a number of factors, so the most suitable answer is – it depends. Releasing cash against the value of your home can be a way of gifting wealth to family members, free of inheritance tax. Their advice is also regulated by the FCA, which gives you an additional layer of protection. It can be particularly useful for covering large expenses later in life, such as long-term care. What are the advantages of equity release? Additionally, mortgage rates are at a historic low which means that Equity Release rates will also be low. They must also ensure that you will never owe them more than the total sale price of your home, even if its value drops. It is very different to modern equity release mortgages where you retain ownership of the … The main disadvantage of equity release is that it does not pay you the full market value for your home. The simple answer is that it depends on your personal circumstances; all the more reason why you should take professional advice before you make a decision. These can make it very expensive to switch to a new, cheaper deal which leaves you a prisoner to your current provider. The effect of compounding interest means that the outstanding balance owed can rise quite quickly. Again, your adviser can help you work this out. Any equity release company that has the Equity Release Council logo on their material must ensure you can still live in your home until you die or move into permanent care. But if you don’t want to sell your home, you may still be able to access a large portion of this money. Almost 39,000 homeowners aged 55 and over used equity release to unlock housing wealth in the first half of 2018. Your adviser can also find the best one for you from the whole of the market and set it up for you. As you enter later life, you may find you need additional sources of income. That’s where financial tools like equity release come into play. Is equity release a good idea? 5. Most providers now offer a ‘no-negative-equity guarantee’, which means the debt will never be more than the sale value of the property. We rely on advertising to help fund our award-winning journalism. The main disadvantage of equity release is that it does not pay you the full market value for your home. Is equity release a bad idea? selling their home privately at a discount in exchange for lifelong tenancy rights, Your other savings and/or sources of income will not be enough to meet your needs in, An independent financial adviser has told you this option is best for you, You can meet your income needs in retirement from other sources, You have the opportunity to release money from your home by downsizing, You want to preserve as much of your estate as possible for your family to inherit, An independent financial adviser has told you this option is not the best one for you. Equity release is a way of spending your home’s value whilst you’re still living there. As with all financial situations, everything is personal making equity release a potentially good idea for some people. Retirees gift £500m to help relatives through Covid cash crisis, Retirement plans in jeopardy: equity release could be blocked if house prices crash, Cashing in on house price boom? Nick Green is a financial journalist writing for Unbiased.co.uk, the site that has helped over 10 million people find financial, business and legal advice. The idea of having to do that in the days after a death, with the funeral quite rightly the top priority, beggars belief. No repayments are made till you die, so the interest compounds rapidly. So I'll quickly run you through the key points you need to consider. Most lenders are members of the Equity Release Council and abide by their rules, which includes the no negative equity guarantee. As most schemes offer a roll-up of interest it means that no payments are made by the borrower. You borrow a lump sum in the form of a mortgage, which is eventually repaid from the sale of your home either when you die or move into long-term care. But just how safe is hollowing out the value of your home? You could also consider paying off the interest as you go, so it doesn't compound. However, releasing equity may not be a good idea if you don’t like the idea of your family’s inheritance being affected. One solution may be to release some money from the value from your home, while continuing to live there. Millions of pensioners are struggling to pay everyday bills despite living in properties worth hundreds of thousands of pounds. To explore the possibilities of whether it’s right for you, you need to think in the long-term and much farther than a five, ten or even 15-year financial plan. There are numerous up-front costs involved in setting up an equity release scheme, so make sure you’re clear on all of these before you proceed. This “rolling up” means that the interest compounds, growing rapidly. Equity release can provide you with a large sum of money to spend while enabling you to continue living in your home. Check your benefits situation With a home reversion scheme, you sell all or part of your property, but with a legal right to continue living in it until you die or move into long-term care. If you choose not to pay off the interest as you go, you will have an ‘interest roll-up mortgage’. Most equity release schemes now have a No Negative Equity Guarantee (NNEG). With a typical 4.5pc rate the debt will have doubled within 16 years. Nick has been writing professionally on money and business topics for over 15 years, and has previously written for leading accountancy firms PKF and BDO. We are a firm of Independent Financial Advisers (IFA’s). You can choose to end your lifetime mortgage early, but this can cost you. The percentage of the property’s value a borrower is looking to release would have the biggest impact on rates. Consider alternatives But…isn’t Equity Release a bad idea? The easy solution, according to the adverts at least, is to equity release. 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