Equity release schemes have experienced something of a boom in recent years as more and more people see the advantages in raising some much-needed capital through their property.
The times have been good for property – over the past decade some people have seen the value of their homes more than double, so it is no surprise that equity release schemes have caught on again.
But equity release hasn’t always had such good press. In the 80s mis-selling was rife and unregulated schemes left many people paying back a loan worth more than the value of their entire home.
So to make sure equity release is right for you MoneyExpert will help explain the process and steer you towards the right deal.
What does it mean?
Equity release means using the value of your home to raise some money. You might be struggling on the State pension or need home improvements, or perhaps you’re looking to afford a more comfortable retirement. Whatever the reason, equity release is only a viable option for people who own their home outright.
Option 1 – downsizing
The most literal form of releasing equity from your home is to sell up and move to a smaller property that is worth less than your current home. By moving you can free up some capital that was previously locked up in the value of your property.
So, for example, if you move from a 4-bedroom family home worth £500,000 into a 2-bed flat worth £250,000, you will come away from the move with £250,000 in cash, less the cost of moving and legal fees.
This is an attractive option for people who can’t manage with a larger property any more and has the added bonus that you still own your home and can leave it to your family when you pass away.
Option 2 – equity Release schemes
Equity release schemes enable you to remain in your home but still raise capital. There are two main forms of equity release – lifetime mortgages and home reversion schemes. If you use your property for home equity release you will not be able to leave it to your family.
The schemes differ but in a nutshell they work by giving you a loan secured against the value of your property. You get the loan straight away as cash (either as a lump sum or as monthly instalments) and continue to live in your home.
How do you repay the loan? When you pass away, the company you took out the scheme with will recover its loan either by selling your property after your death or if you sell your property – for example to move into a care home.
Equity release schemes can be complicated and MoneyExpert.com recommends taking independent financial advice before deciding on anything. In fact, research by MoneyExpert.com shows that pensioners opting to raise cash from their homes risk paying as much as £1,400 extra a year in interest, depending on which scheme they go for.
MoneyExpert.com has a consumer comparison service for lifetime mortgages, listing 49 different products from around 18 providers.
Our analysis reveals the average APR charged is 7.45 per cent with a range from the lowest at 6.4 per cent to as high as 9.2 per cent – a difference between the highest and the lowest of 1.75 per cent.
That spread of interest rates has a major effect on the amount of interest a homeowner will pay – someone releasing £50,000 from their home would pay annual interest of £4,600 at 9.2 per cent, compared with just £3,200 at 6.4 per cent and £3,725 at the average 7.45 per cent.
However equity release isn’t all about cost – but as an important and growing source of finance for the UK’s retired homeowners cost is always an important feature. Think carefully before choosing a lifetime mortgage as the differences in interest rates reveals there are real financial consequences from the choice you make.
Customers need to be aware that certain low rates are only on offer to people borrowing higher amounts. Rates can also vary depending on how much of the value of the home is set against the mortgage.
There are of course plenty of other considerations apart from interest rates. One key consideration is whether firms are members of Safe Home Income Plans – SHIP for short – a voluntary body setting a code of conduct for members.
SHIP members are indicated on the MoneyExpert.com website. All SHIP’s members offer a "no negative equity guarantee" which means when a customer dies their estate will never be charged more than the value of the property – therefore protecting other assets of the estate.
Some products also offer a drawdown facility allowing clients to release cash over a period of time. All users of the MoneyExpert.com service are directed to take advice if they opt to take out a lifetime mortgage.