By understanding the pros and cons of equity release, you can assess whether unlocking home equity is right for you.
With the cost of living having hit a 30-year high, more people are looking to their homes as a potential source of funds.
After a lifetime of paying off your mortgage and watching house prices rise, the value locked inside your property can seem like an inviting pot of gold.
Equity release offers a way to finally access this housing wealth while retaining the right to live there until you pass away or enter long-term care.
But is raiding your home's equity a clever retirement finance strategy or a risky quick fix?
What is equity release?
Equity release turns the value tied up in your home into tax-free money while letting you live there until you die or move into care. There are two types:
Lifetime mortgages - You take out a loan secured on your property which gets repaid from the sale proceeds when you leave your home. No monthly repayments need to be made, and the interest rolls up over time. Some products allow you to make interest payments. This is an equity release mortgage.
Home reversion - You sell all or part of your home at below market value in return for a lump sum or income. The property is sold when you die or move out.
LiveMore do not offer Home Reversion Plans.
You must be aged 55+ to equity release, and the percentage you can unlock depends on your age.
The pros of equity release
Equity release pros and cons don't always get balanced coverage. Used appropriately, there are good reasons people opt to access housing equity:
- Tax-free cash - You don't pay income tax on money released.
- Pay off debts - The lump sum can clear loans and credit cards.
- Home improvements - Fund renovations like a new kitchen or loft conversion.
- Supplement retirement income - Extra cash for holidays, hobbies and daily costs.
- Later life care fees - Money could cover potential future care needs.
- Support family - Help kids with house deposits or university costs.
- No repayments - Lifetime mortgages have no monthly payments to worry about.
For many, equity release offers financial flexibility in old age. But what are the potential downsides?
The cons of equity release
- Less inheritance - Your estate will likely be smaller when you die.
- Interest rolls up - Debt grows quickly as interest gets added.
- House value risk - If prices fall, debts may exceed the sale value.
- Hard to move - Equity release may make it tricky to downsize.
- Family disputes - Arguments could arise over reduced inheritances.
- Scams - Some plans are poor value or even fraudulent.
- Early release is less worthwhile - Unlocking cash before you need it reduces benefits.
- Alternatives may be better - Like downsizing or using pension lump sums.
- It may affect the amount of benefits being received or applied for.
- What are the pitfalls of equity release? - It's vital to fully understand the risks before committing.
How equity release works
Now we've covered pros and cons, here's a quick rundown of how equity release works:
- You consult with an FCA regulated adviser who checks if equity release suits your needs.
- They recommend products from whole-of-market providers. You choose a plan that meets your requirements.
- Legal checks are done on the property's title and valuation. You then sign the contract.
- The provider pays out your tax-free cash lump sum. For lifetime mortgages this gets secured against your home.
- You continue living in the property until you die or move into long-term care. At this point the property gets sold to repay the released equity and accrued interest.
- Remaining sale proceeds go to your beneficiaries, minus any outstanding debts.
How Much Equity Can You Release?
LiveMore offer holistic advice. We will discuss different types of mortgages to see if any are right for your situation and for your future.
Seeking equity release advice is essential
Equity release lets homeowners unlock property wealth but can reduce future equity available to heirs. Weighing up the equity release pros and cons for your situation is crucial.
Regulated financial advice helps ensure you only proceed if equity release is right for you. The adviser covers alternatives, explains the risks and assists selecting a suitable product.
Used wisely it can provide you with extra financial options, but uninformed decisions could prove costly. Understanding the pros and cons allows you to make an informed choice.