Sometimes, homeowners need a significant cash injection — especially if you’re in your later years. Maybe you’re looking to help your grandchildren get onto the property ladder, or you’re looking to make the most of your retirement by taking the holiday of a lifetime. Rather than dipping into your savings or maxing out on your credit card, you might consider releasing equity from your home.
While releasing equity seems like a great ‘quick fix’, there are serious long-term ramifications to consider; not just for you, but also for anyone who might inherit your assets once you pass.
This blog post explores the pros, cons, and risks involved in releasing equity — and what you can do instead.
How does equity release work?
If you’re in your later years, and you’re in need of some money, you can release equity from your home without having to sell it altogether. This option is available for homeowners aged 55 and over, and lets them release cash from their home without having to pay tax on it. The cash can be paid out in a large sum, multiple smaller instalments, or a combination of both.
The equity that’s released is effectively a long-term loan that doesn’t need to be paid back until the homeowner passes away or sells the property.
There are two types of equity release schemes:
- Lifetime mortgage: This is the most popular equity release scheme. With a lifetime mortgage, the homeowner agrees to release a percentage of the property’s equity. This money comes attached with a fixed interest rate which accumulates and adds to the total money owed. Some homeowners choose to make interest payments to lower the debt, and so their beneficiaries still get more inheritance when they die.
- Home reversion scheme: In this scenario, the homeowner will trade in a percentage of their home’s future sale profits for a smaller amount of equity. The upside is that there’s no interest on this equity.
Some lenders also offer enhanced lifetime mortgages. These are a great option for homeowners with a shorter life expectancy, who want to release some cash from their home in order to cover the costs of private care.
Reasons for releasing equity include:
- Paying off debts
- Paying for private care or covering medical bills
- Renovating the property
- Struggling with retirement living costs
- Paying off an outstanding mortgage
- Paying for an expensive holiday
- Helping family members (children, grandchildren etc) financially
- making a major purchase (like a car)
On the surface, releasing equity seems like a smart, risk-free endeavour that allows you to get the cash you need without having to relocate. So what could possibly go wrong?
Unfortunately, releasing equity from your home can have serious negative long-term implications; and there’s an abundance of equity release horror stories that caution against it. Before moving forward, it’s important to understand the pitfalls of releasing equity — and what you should do instead.
We’ve laid out some of the disadvantages of releasing equity below.
- Negative equity: When the interest charged on the equity you’ve released is higher than the value of the property, you’ll be left owing more than the property is worth.
- Inheritance: Releasing equity could significantly reduce how much money your family members will inherit once you pass on. This could be due to high interest on the equity, or spending the equity you’ve released.
- Compound interest: You’d have to pay compound interest on the equity loan, or in other words, paying interest on the interest. When the time comes to pay back the loan, the interest will have shot up, and you might not be able to afford to pay back the loan at all.
- Additional costs: You could also be faced with additional costs, such as early repayment fees or surprise charges.
- Benefits: Releasing equity from your home might impact your entitlement to specific benefits; such as universal or pension credit.
If the above points weren’t compelling enough, there are also plenty of real life examples that showcase what happens when releasing equity goes wrong. This blog post by ThisIsMoney details the story of an elderly couple who were faced with £119,391 in interest charges on the equity they’d released 11 years prior. The Tamplins had failed to read the small print on the equity-release loan, and fell into a classic trap of extortionate compound interest. As a result, they were unable to move out of their shared property and into a care home.
If the previous section has you rethinking your plan to release equity, there’s good news: There are alternatives to equity release that offer a lot less risk.
Alternatives to releasing equity include:
- Using your personal savings
- Selling your home and downsizing to a smaller property
- Asking for financial help from family and friends
- Exploring what state benefits you may be entitled to
- Getting a personal loan or credit card
- Remortgaging your home
There are a lot of things to consider before releasing equity. Ultimately, you should consider the long-term financial implications; and not just your short-term financial needs.
Despite the risks, it can also still be a worthwhile course of action. As is the case with any big financial decision, you’ll want to speak to a professional. In this case, a qualified equity release advisor. They’ll help you compare equity release schemes, and make sure you understand the risks involved with each option.
Each equity release scheme comes with different terms and conditions. Some even come with ‘no negative equity release’ measures, so you can rest easy knowing you’ll never owe more than the property is worth.
If you need to pay off your equity release loan, and you’re looking for cash house buyers, We Buy Any Home can make you an offer on your home within 7 days.
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