You are nearing 55, your debt hasn’t been paid off, your once-in-a-lifetime holiday hasn’t been booked, and you’re not entirely sure how you’ll manage your finances once you’ve retired.
What do you do? You look into equity release. It is a relatively easy way to release tax-free funds from your home on those all-important financial goals. Jason Stubbs of EveryInvestor runs through the pros, cons and pitfalls of equity release and answers the all-important question: is equity release good?
What Is Equity Release and How Does It Work?
Equity release allows you to unlock the cash value of your property without having to move or sell your home.
There are two main types of equity release:
You borrow some of your home’s value at a fixed interest rate, but you don’t have to start repayments until you die or sell your home unless you want to.
A provider pays you a tax-free lump sum for a portion of your home – generally below market value. When you die or sell your house, a percentage of the sale is paid to the lender.
Why Would You Opt for Equity Release?
Equity release can help in several situations. Some of which might be:
- Paying off debts.
- Helping a loved one buy their first home.
- Renovating your home.
- Buying your dream car.
- Taking that holiday of a lifetime.
Who Qualifies for Equity Release?
If you own a property in the UK, you are one step closer to qualifying for equity release.
Other factors that play a role are:
The minimum qualifying age for equity release is 55. If you are a couple, the age of the youngest will be taken into consideration.
Your Property Value
Your property must be valued at a minimum of £70,000 and must be in good condition.
Your Credit History
Bad credit history does not automatically disqualify you from obtaining equity release. The lenders will consider the terms and conditions of your credit history issues and decide based on their findings.
Is There a Downside to Equity Release?
Equity release will not pay you the total market value of your property. You could make a lot more money if you were to sell your property on the open market – this would, however, mean having to move and either having to rent or invest in a new property.
Another downside is that equity release will eat into any inheritance you plan on leaving for your loved ones. This may be a big negative for some, but remember that this is your life, and you should live it.
Alternatives to Equity Release.
If you are looking to preserve as much of your estate as possible for your family to inherit, consider some of these alternatives:
Selling your home and moving into a smaller, less expensive one may be the most obvious alternative. Downsizing can also mean spending less money on maintenance, running costs and possibly even Council Tax.
Rent Out a Room in Your House
If you have a spare room, or even better, a garden cottage, you might consider renting it out for an additional income. This option will not appeal to everyone. It’s difficult sharing your living space with someone else, and there are significant responsibilities involved in renting. Do your research before committing to anything.
Once you’ve hit retirement, you may not be ready to stop working altogether. Maybe you have a side-hustle or a hobby you would like to focus on and become an income generator.
If you don’t have any hobbies and wonder what else might generate an income, consider dog walking or pet feeding, home tutoring, gardening, or painting and decorating. There are plenty of options to consider.
Get a Retirement Interest-Only Mortgage
Opt for a retirement interest-only mortgage instead of a lifetime mortgage (equity release). The significant difference between the two is that you borrow a large lump sum of money and pay off just the interest on the interest-only loan. When your home is sold, the amount repaid will be the same as you borrowed, leaving more for your loved ones to inherit.
Equity release can be a financial lifesaver, but it is a big decision.
Talking things over with your family and friends helps, but getting the right advice from an independent financial advisor is critical.
The Financial Conduct Authority (FCA) regulates the market, so advisors, brokers, and lenders must adhere to strict codes of conduct and rules. This should provide you with peace of mind.
Whether you need to pay off your debt or want to book that holiday to the Masai Mara, an equity release is undoubtedly an option for you to consider.