Equity release can work for people over 55 who need a boost to their finances. You get to release tax-free cash from your home and continue living there. But before you get started, you should be aware of a few risks.
The most common type of equity release is a lifetime mortgage. You borrow money against the value of your home at a set interest rate. This tends to be fixed for the full term of the plan.
The capital and interest only need to be repaid when the plan ends. This is usually when you, or the last owner if you have a joint plan, dies or enters long-term care.
As you don’t need to repay during the plan, interest charges can grow quickly. This is because interest is added to the capital amount plus the interest already accrued.
This means you or your family won't have to repay more than the home is worth when your plan ends. Some lifetime mortgages, including the Saga Lifetime Mortgage (provided by Just) let you repay some or all the interest on the loan monthly. This reduces the amount owed at the end of the plan. All providers who are members of the Equity Release Council offer a no negative equity guarantee.
Life doesn’t always follow the best-laid plans. You might find that you want to cancel your equity release plan before it’s due to end. If you cancel early, you may face an early repayment charge. The amount can vary. Some common reasons for not having to pay a charge are:
Another type of equity release plan, a home reversion plan, involves you selling a share of your home to a provider. In return, you get a lump sum or regular amounts, and you can remain living there. When the home is sold, the provider gets a set percentage share of the proceeds.
You or your family won't benefit from any rises in value on the share of your home that you’ve sold to the provider. For example, if you were to sell a 40% stake in your home to a provider, you would only see 60% of any future house-price increases.
You might be keen to release as much equity as you can from your home and spend the cash freely. But releasing too much cash can be costly.
You will pay more interest on a lifetime mortgage than your cash will earn sitting in a savings account. You could be releasing money that you don’t need for little benefit.
It is possible to arrange a lifetime mortgage with the option for a drawdown facility:
Although you might have a large amount of equity in the value of your home, you can't access all of it with equity release. The amount you are offered can be much less. This is because equity release providers must often wait many years before they are repaid.
The younger you are and the better your state of health when you sign up, the less equity you’ll be able to unlock. With some providers you have the option to disclose any health issues, as you could generate more money from an ‘impaired life’ scheme.
The shorter your life expectancy, the sooner the company can expect to get its money, allowing it to offer you better terms.
Lifetime mortgage interest rates change over time. If it’s some time since you took out your plan, it may be worth seeing if better rates are available. First you should check any early repayment charges that you might face.
If you take out equity release, you could lose your access to some state benefits. People who rely on Pension Credit, Savings Credit or Council Tax Reduction should consider the impact first. During the advice process, the adviser will assess any potential impact to your state benefits.
If you need more money in retirement, equity release might be a good option. But it’s worth considering other options, given the pitfalls above.
You might be able to downsize or borrow money another way. For example, your family might be able to help you. You might also be eligible for local authority grants if you want to use the money for home repairs or improvements.
A good equity release adviser will discuss your options with you and only recommend equity release if it’s the most suitable option.
If you want to explore your options and avoid the common pitfalls of equity release, Saga Equity Release is here to help. Our no-obligation advice service is provided by HUB Financial Solutions Limited.
Find out more about the service and fees here.
The team at Saga Equity Release can help you decide whether equity release is right for you. Arrange a call back at a time that suits you.
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