For people over 55 looking to free up funds from the equity held in their property, equity release can be an attractive idea. But some people might be wary of equity release, especially if they have heard horror stories about it in the past.
Some equity release products aren’t favourable to customers and even in the highly regulated market of today, people should approach equity release with caution, as there are some untrustworthy equity release lenders you need to avoid who will try and profit from people’s lack of knowledge.
For those looking for an equity release product, they should ensure that the lender and broker are members of the Equity Release Council as this affords them extra protections.
So, is equity release a good idea in 2022? What benefits and pitfalls might borrowers encounter along the way?
This short guide concisely breaks down the complexity of equity release.
What Types of Equity Release Are There?
There are two types of equity release available in the UK, lifetime mortgages and home reversion plans.
Lifetime mortgages are mortgages that are secured against your property. You won’t make monthly mortgage payments (unless you choose to) and the property will be sold or refinanced by your beneficiaries in the event you go into long term care or pass away.
This is by far the most commonly used equity release product.
Home Reversion Plans
With home reversion plans the property is technically sold to the lender and you will be able to continue living in it until you pass away or go into long term care. You will become the leaseholder of any portion of the property that you maintain ownership of.
This isn’t as common as a lifetime mortgage but depending on your personal situation your broker may advise it’s the best option for you.
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The Benefits of Equity Release
Equity release allows you to borrow money against the equity you hold in the property. Typically, lenders allow you to borrow up to 50% of the value of the property.
To qualify, you must be over the age of 55 and, on completion, there must be no other financial products secured to the property.
Equity release funds can usually be used as you see fit as long as it is not for illegal means. There are no requirements that you spend it on a particular area and unlike traditional loans and mortgages which may require you to divulge your reasons for needing the money, you don’t have the same restrictions.
This means you can use equity release to do the following and more:
- Buy a new car.
- Gift money to children or family members.
- Use the funds to purchase a second property.
- Go on a holiday.
- Home improvements.
- Buy a caravan or campervan.
The scope of what you can use the money for is vast. You can opt to have the money paid in a lump sum, as a regular payment or some people prefer to combine both an initial lump sum and regular payments thereafter.
There are other benefits that only apply to products approved by the Equity Release Council. These include:
1) No Negative Equity Guarantee
2) Permanent Rights to Reside in the Property until Death or movement to Long-Term Care
3) Portability from one Property to Another
4) Tax Benefits
There are a number of drawbacks to equity release. The most common are that you may erode the inheritance you’re leaving to your next of kin if you do not service the interest and that it is a lifetime commitment.
There are other potential drawbacks that your equity release broker will outline in detail in your initial consultation.
Equity release can be a lifeline for those looking to raise money from their property without selling it. It is definitely worth considering in 2022 but you should do so with caution and discuss your circumstances with a reputable equity release broker.