is equity release a bad idea

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. 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’). 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. Use an accredited provider … 1. That’s where financial tools like equity release come into play. Your adviser can also find the best one for you from the whole of the market and set it up for you. This may sometimes offer better value, but isn’t easy and requires in-depth legal and financial advice. Whether a lifetime mortgage or a home reversion scheme is best for you will depend on a wide range of circumstances, such as how much you hope to leave your family as an inheritance. If you don’t pay off the interest at regular intervals, the entire sum will compound – so at around 5 per cent interest, the amount you owe would double every 15 years. 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. Then no doubt someone has already mentioned equity release to you as a way of redressing the imbalance. So, it’s not a bad thing anymore, but it might not be suitable for everyone. Another good reason to do this is that your money is better off invested in your home (where it is likely to grow) than in a cash bank account. Consult an independent financial adviser or mortgage broker specialising in equity release. Equity release can provide you with a large sum of money to spend while enabling you to continue living in your home. The main disadvantage of equity release is that it does not pay you the full market value for your home. See the examples below. Equity release is not a scandal – although it was back in the late 1980s when companies such as Fisher Prew Smith (long defunct) fleeced borrowers, and some lenders went on to … Interest rates can be as low as 3.4pc and are usually fixed for the life of the loan. Make sure the provider you use belongs to the Equity Release Council, so you are protected from pitfalls like negative equity. You could lose your entitlement to them. Finding yourself house rich and cash poor? 5. One thing to consider is: if your mum is only on state pension, releasing equity might affect any means-tested benefits, pension credit for instance. Equity release is often the only method available for older people to extract funds from their property without downsizing or selling. Equity release is often the only method available for older people to extract funds from their property without downsizing or selling. You also have the right to ask a solicitor to check all the documents before signing up to a scheme. 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. Most providers now offer a ‘no-negative-equity guarantee’, which means the debt will never be more than the sale value of the property. While rates are the cheapest they've been in years, equity release itself is still an expensive and risky way to raise cash. With any form of equity release, have your independent financial adviser or mortgage broker explain the risks to you in detail, including how much it could cost your family in the long term, and whether downsizing might be a better option. These challenges could be causing some advisers to shy away from equity release. Again, your adviser can help you work this out. Read our community guidelines in full. Am I protected when using equity release? 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. Is equity release a good idea? 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? 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? With a lifetime mortgage, you run the risk of owing far more than you borrowed when the time comes for the home to be sold – up to the total value of the property (but not more than that). Thus begging the question, is equity release good or bad? You’ll have to tell your equity release company so that they can decide if your new home is similar in value. The amount of equity you can release depends on your property value and any outstanding mortgage or debt. Telegraph Money asked Alan Lakey, an independent financial expert who advises on equity release, for guidance on the good and bad. Is equity release a good idea? However, there are downsides to accessing the value of your home in this way. Ask both a financial adviser and a solicitor to study the contract for you to ensure that it is in your best interests. 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. Extracting cash could mean that any means-tested benefits – spectacles, dentistry, council tax and pension credit  could be impacted. If you are receiving any benefits in addition to the state pension, check how these might be affected if you were to use equity release. Most equity release schemes now have a No Negative Equity Guarantee (NNEG). In this case you will end up repaying more overall, as the interest will compound over time. Last year, 23% of retired homeowners who took out an equity release plan said lending to their loved ones was their motivation. It is possible to cut out the middle-man and set up your own equity release arrangement. The specific risks vary with the type of scheme you choose. Generally, the older you are when you take out the scheme, the more money you’ll get. Is equity release a good or bad idea? Unlike residential mortgages, where a borrower pays off the interest charges each month, the interest on equity release loans is usually added to the overall debt. They must also ensure that you will never owe them more than the total sale price of your home, even if its value drops. Whether it’s a good idea or not, depends on a number of factors, so the most suitable answer is – it depends. Only by considering all your available options will you know that equity release is the best one for your circumstances. 4. Check your benefits situation Look at alternative sources of income, such as downsizing or renting out a room. Of course, it helps that the sums released are tax-free. You may have read mixed reviews about equity release. Thus equity release is particularly useful for elderly persons who do not intend or are not able to leave a large estate for their heirs when they die. Total lending also increased from £385.7m to £446.2m. Martin Lewis explains what equity release is and how it might help your finances. This is particularly useful for those with interest-only mortgages and no repayment vehicle. 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. One way to reduce this risk is to pay off the interest as you go. What are the risks and pitfalls of equity release? The money you receive from a lifetime mortgage loan is tax-free. Because who’d willingly want to make a non-informed financial decision based on their biggest asset that takes decades to pay off? As with all financial situations, everything is personal making equity release a potentially good idea for some people. 6. Equity release is a way of spending your home’s value whilst you’re still living there. Let us match you to your perfect financial adviser. 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. Choose the right form of equity release for you and your family This way you will not be paying interest on the whole sum for the whole period of time, so the amount you end up owing will be less. What does it cost to set up equity release? It’s done via a loan, which is usually repaid from your home’s value once you die. But just how safe is hollowing out the value of your home? 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. Most lenders are members of the Equity Release Council and abide by their rules, which includes the no negative equity guarantee. This ensures that borrowers know in advance how much will be owed in the future. Releasing cash against the value of your home can be a way of gifting wealth to family members, free of inheritance tax. The idea of having to do that in the days after a death, with the funeral quite rightly the top priority, beggars belief. This is known as equity release. We’re not saying equity release is a bad idea, it’s a viable option if you need the funds, but just like any debt it needs to be manageable, and you need to … At heart, equity release is actually a clever idea. If you do want to leave your property, then there may be alternative ways to raise the money you require. If you choose not to pay off the interest as you go, you will have an ‘interest roll-up mortgage’. The two popular types of equity release are. Additionally, mortgage rates are at a historic low which means that Equity Release rates will also be low. The minimum age for a home reversion scheme may be 60 or 65. 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. The loss of benefits may make equity release poor value for you. Try our calculator to find out", "See how much cash you could release from your home". This can enable you to borrow more, or to pay lower interest. To understand how these common equity-release pitfalls might influence your situation, you should discuss any possible deals with a financial adviser. If you want to move home, you can keep your scheme running as normal. Equity release is a way of freeing up the money in your home without having to move. The Top 3 … Almost 39,000 homeowners aged 55 and over used equity release to unlock housing wealth in the first half of 2018. If you have paid off most or all of your existing mortgage, you can consider an equity release scheme. 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. Many of the mortgage advisers and financial advisers listed with Unbiased offer high quality independent equity release advice. The main disadvantage of equity release is that it does not pay you the full market value for your home. For example, borrow £20,000 aged 65 at 6.5% on a £120,000 home and live 25 … Your adviser can help you with this choice. Equity release schemes are designed to be a lifelong commitment, so, if you change your mind, need to move house or want your equity for something else later, you could find yourself seriously restricted. Whether equity release is right for you or not will depend on your circumstances. It is very different to modern equity release mortgages where you retain ownership of the … 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. These can make it very expensive to switch to a new, cheaper deal which leaves you a prisoner to your current provider. We will look at all the financial solutions that are available to you, not just Equity Release. You can choose to end your lifetime mortgage early, but this can cost you. The pros and cons. EQUITY release schemes were today labelled 'the lifestyle dream that can turn into a nightmare'. The Equity Release Council was set up to protect people from losing out from these schemes. 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. No other loans can be taken using the property as security. Yet another is that having lots of money in your account may reduce the benefits you are entitled to, including help with the cost of care. And in the first six months of this year that rose to 31%. 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. They’ll be able to give you an unbiased, no-obligation insight into equity release, and help you to see if its right for you. Some scandals in the 1980s gave the whole equity release market a bad name, but with a meticulous plan provider, there is nothing to worry about. 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. Your state of health is also taken into account – being in poor health usually means getting a larger share of the value of your home. 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. 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. Be sure also to check out sovereignboss and see how much equity you can release with the equity release calculator. 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. 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. 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. This is a major decision, so should never be taken without independent professional advice. F inding yourself house rich and cash poor? Find out more, The Telegraph values your comments but kindly requests all posts are on topic, constructive and respectful. Just 24 product options existed in 2007. Whether you sell all or only part of your home, you won’t receive full market value for it, so bear this in mind when making your decision. Equity release might seem like a good option if you … The effect of compounding interest means that the outstanding balance owed can rise quite quickly. Their advice is also regulated by the FCA, which gives you an additional layer of protection. You also need to make sure that your home reversion contract allows you to move home, if necessary, and that there are no elements of the contract that could cause you unwanted problems or expenses further down the line. 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. Read on to find out more about these different types of equity release. 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. As you enter later life, you may find you need additional sources of income. 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. Selling the house for a lump sum with a right to continue living in it is equity reversion which justifiably has had a bad press over many years with lots of horror stories. It can be particularly useful for covering large expenses later in life, such as long-term care. The obvious advantage of equity release is that it gives you money to spend now, rather than leaving it locked away in your home. So I'll quickly run you through the key points you need to consider. The main disadvantage of a home reversion scheme is that you will only receive (usually) a maximum of 60 per cent of the market value of your home, and often much less (as little as 30 per cent). The question then becomes, is equity release a good idea? If you are using a lifetime mortgage, it can be more cost-effective to take out a series of smaller loans rather than one big loan, as then you will pay less interest over time. Unlocking equity from your home can be a great way to get some extra cash in retirement. The equity release industry is represented by a trade body called the Equity Release Council (ERC). Unlocking the wealth in bricks and mortar can make sense, but it is not a decision to be taken lightly. Your equity is the total market value of your home, minus any mortgage you haven’t yet paid off. If you do take one out, you should consider checking to see if you can get a better deal once the early-repayment charge period has ended. And where can I find unbiased equity release advice that I can trust? It is important to check the terms and conditions before taking out the plan. You may have read mixed reviews about equity release. 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