Millions of homeowners in the UK have money locked away in the value of their homes. In simple terms: they owe less than their property’s market value. And in many cases, they owe nothing at all.
So when it comes to raising cash in a hurry, these homeowners can unlock some of that value without moving out.
You have the option of taking small amounts of cash up to a fixed limit (drawdown) or taking a lump sum. In effect, you’re selling a portion of your property to a third party.
But this isn’t a course of action to be taken lightly. Selling a portion of your home is a big step — with significant consequences for the future. That’s why we’ve researched the issue to bring you the pros and cons of equity release schemes.
The pros and cons of equity release schemes – pros
You get to stay in your own home
Equity release is often the best course of action for retirees who need to unlock equity without moving. The money released is also tax-free.
No monthly repayments
Most equity release schemes don’t involve repayments. Instead, the loan and any interest accrued clawed back when the borrower passes away and the house sold; what’s left after repayment of the equity release advance is added to the deceased’s estate.
Get the no negative equity guarantee.
If you approach an equity release lender a member of the Equity Release Council, you’ll benefit from the no negative equity guarantee. So, if you ever end up in a position where you owe more on your home than it’s worth, the lender absorbs the risk — and won’t ask the borrower to make up the shortfall.
Relatively low-interest rates
You can unlock some of the equity in your home by taking out a secured loan. However, this involves making regular repayments. And the interest rates charged are often sky-high.
With an equity release scheme, you can pay under 4% interest — fixed for the entire duration of the agreement, meaning you can plan for the future, knowing how much your estate will owe when you pass away.
Avoid inheritance tax
If your estate — including your home — exceeds the current inheritance tax threshold set by the government, your beneficiaries stand to receive a significantly reduced inheritance. One way around this is using equity release to gift loved-ones cash while you’re still around.
Who knows what the future has in store? You never know what expenses are around the corner. So why take out more of your home’s equity than you need to? Certain equity release products allow you to withdraw money from a “pot” as and when you need it.
The pros and cons of equity release – cons
Although most equity release lenders offer relatively low-interest rates with compound interest added, meaning a rate of 4.5% could double your debt in just 16 years.
Limited freedom to change providers
Early repayment charges can be very high with equity release schemes — sometimes as high as 25 per cent, making shopping around for more competitive deals once you’ve signed up to one complicated.
If you receive means-tested benefits, you might become ineligible for them if the money you release from equity release puts your income above a certain threshold.
That’s your lot!
Once you’ve signed up for an equity release scheme, you probably won’t be able to take out other loans or advances against your home.