What is the catch with equity release in April 2024?
In this article, we look at what the catch is with equity release and what its advantages are.
What is equity release?
Equity release is a way to release the value in your home without having to move out. It’s a way of borrowing against the value of your property now to release cash now, so you can have more income now or spend it now.
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How does equity release work?
Equity release is when you borrow money against your property, normally your home. The amount you can borrow will be subject to your age, the value of your property and interest rates at the time
You might get something like this
- You are 65 years old, you own a house worth £300,000.
- Your costs come to £1500 per month (maintenance etc) but pension income covers only £1200; so, if you released £100,000 from the value of your home (equity), that would give you an extra £200 per month.
You can use an equity release calculator to work out how much you could borrow.
What is the catch with equity release?
The catch with equity release is that after you release the cash, when you die your home will have to be sold to settle the debt.
If your estate is worth less than the value of your loan, this isn’t a problem – but if it’s worth more than the value of your loan, your family could find themselves with an unexpected bill for any shortfall.
The other disadvantages of an equity release mortgage are :
1 – The interest rates and fees can be high – and they may not stay as low as a bank or building society interest rates. The effect of compound interest can really add to the amount that has to be repaid.
2 – You may lose some control over your home because it could be sold without your say-so;
3 – That’s why it’s important to get the best deal you can (see below) and weigh up any equity release agreement with a carer who understands what it involves.
4 – You lost the ability to pass on an inheritance to your loved ones because of the money you borrowed.
5 – You lose control of your home
6 – There is no safety net if things go wrong: if you miss a payment your equity release provider may take legal action against you and potentially repossess your home; and
7 – If borrowing a lump sum, there is the potential to overextend yourself.
8 – You’ll add interest onto the amount you owe (on top of legal and other fees) if you choose a drawdown lifetime mortgage plan; and
9 – Equity release usually costs more than standard personal loans because the interest rates tend to be higher due to increased risk for providers; and You might end up paying back more money than you borrow in some cases – perhaps if your home’s value goes down in future, or if you take out a plan with a lower interest rate.
10 – Early repayment charges can be high
It’s also easy to run up other debts at the same time as taking out equity release – because you can borrow as much as you need for your home improvement projects.
The bottom line is that you should always get equity release advice before deciding what route to take. A mortgage broker mauy be able to help but we woudl recommende that you speak to a specialist equty release advisor at all time.
Who should consider equity release?
You would consider an equity release product if you are struggling with your outgoings or want funds now, rather than waiting until later on when they might be more expensive (e.g. funeral costs).
Equity release could also be beneficial if you’re still working and your pension isn’t big enough to live off yet, while interest rates are low, so this is another time when it could be cheaper to borrow via equity release than to take out a loan.
Who is most likely to benefit from equity release?
An equity release scheme is only right for people with a house that’s worth more than they need – or when the value is expected to rise in future. They’re also suitable if you have savings but don’t want to use them, and you need the extra income now.
It might also be right if you want to make some alterations to your home which would otherwise be impossible because of strict mortgage rules.
"Equity release is a way to release the value in your home without having to move out."
Main types of equity release plans
There are two main types of plans:
Lifetime mortgage plans
This is where your repayments stay the same throughout the term; and
Home reversion plans
This is where your monthly payments reduce in time; and
The price you pay will vary from equity release company to equity release provider, so get several quotes and ask around before choosing
What are the pros of equity release?
As well as releasing cash now, there are other benefits to equity release:
– You won’t need to move out
– There are no monthly repayments
– The interest rate is usually lower than personal loans or credit cards
– A grest way to get some extra cash to top up your pension and enjoy your retirement
– A way to fund your later life care costs
The latest equity release interest rates as at 1 April 2024
The table below shows you the latest rates, as at 1 April 2024, for lifetime mortgages from some of the leading equity release providers in the UK.
| Product | Provider | Interest Rate | Incentives |
|---|---|---|---|
| 5.26% | |||
| 5.31% | |||
| 5.46% | |||
| 5.58% | |||
| 5.60% | |||
| 5.60% | |||
| 5.61% | |||
| 5.61% | |||
| 5.63% | |||
| 5.65% |
Other pros of releasing equity are that you don’t have to pay it back if you stay in your home for the rest of your life, and there are no monthly repayments unless you choose to pay some back.
Is equity release safe?
Yes, but you should always get financial advice before committing yourself to an equity release provider, and read the small print carefully
It is considered safe because : – Equity release providers must be authorised and regulated by the financial conduct authority – Your home can’t be repossessed if you fall behind with your repayments; and – It is secured against your property, so it’s less risky than unsecured loans like credit cards.
How long does equity release last?
This varies depending on the equity release plan you choose. Some equity release plans will last until your death, while others only need to run for a set number of years – and some can be paid off fully before term ends (though this would incur extra costs).
What is a no negative equity guarantee?
A no negative equity guarantee is a security assurance that if your home is valued less than the amount you owe when you die, the equity release provider will not seek to recoup any further money from your estate. The benefit is that it means your beneficiaries won’t have to pay off any of the remaining debt.
Who regulates equity release?
The Financial Conduct Authority (FCA) regulates all firms that advise on or sell equity release. This gives you peace of mind, security, and access to the Financial Services Compensation Scheme if you need it.
Choose a product from a company that is a member of the Equity Release Council.
What is the role of the Equity Release Council?
The equity release council was established to uphold best practice in the industry. It is responsible for promoting high standards of customer service, which includes ensuring that any adverts or information provided by equity release firms is fair, clear and not misleading.
Equity Release Council members are regularly reviewed to meet strict membership criteria.
Is money from equity release tax free?
Equity Release is not subject to income tax because it’s not a type of income; it’s a loan, much like a house mortgage. You are not taxed if you intend to use Equity Release to supplement your income.
What percentage can you borrow using equity release?
Generally, you can borrow between 30% to 60% of your home’s value. However, some providers allow you to borrow more than this. Equity release loans are secured on your home which means that they’re safer than other types of loans. This also reduces the interest rate you pay because the equity release provider is taking less risk, too.
What are the pros of a lifetime mortgage?
The pros of a lifetime mortgage are as follows:
– Payments are usually lower than rent
– You can stay in your home for the rest of your life
– If you move, you pay back what you owe.
What is the catch with a lifetime mortgage?
There are some disadvantages with lifetime mortgages, including:
– You don’t own your home until you die
– If someone is dependent on the equity released income you could lose their source of income
– The tax treatment on your death changes depending on the proportion of your estate that is passed through a lifetime mortgage. This could potentially leave you or your estate paying more inheritance tax than if it had been paid back in another way.
What are the pros of a home reversion plan?
The pros of a home reversion mortgage are as follows:
– You don’t have to make any monthly payments
– Applies regardless if you own your home or not
– If you live longer than expected, the loan doesn’t just keep growing. The equity will be released back to you when the plan finishes
What is the catch with a home reversion plan?
Some disadvantages of home reversion plans are as follows:
– You don’t own your home until you die
– It can take years before all money has been given out, meaning that some people may die before receiving all their equity release cash
– Your property could end up being sold at market value – which means it’s not always possible to decide yourself what you want to be done with your equity release
– If someone is dependent on your equity release income, they could lose their source of income
– The tax treatment on your death potentially changes depending on the proportion of your estate that is passed through a home reversion scheme. This could potentially leave you or your estate paying more inheritance tax than if it had been paid back in another way.
Frequently Asked Questions
What is equity release?
Equity release is a way to release the value in your home without having to move out. It’s a way of borrowing against the value of your property now to release cash now, so you can have more income now or spend it now.
How does equity release work?
Equity release is when you borrow money against your property, normally your home. The amount you can borrow will be subject to your age, the value of your property and interest rates at the time
What is the catch with equity release?
The catch with equity release is that after you release the cash, when you die your home will have to be sold to settle the debt.
Who should consider equity release?
You would consider an equity release product if you are struggling with your outgoings or want funds now, rather than waiting until later on when they might be more expensive (e.g. funeral costs).
