Release me – equity in your home could be an option
Equity release. Sounds scary. But don’t discount it just because it might seem over complicated and difficult to understand.
Equity release schemes are becoming increasingly popular as more homeowners come to realise the advantages of raising money through their property.
And there has never been a better time to look to your home for some extra cash. Over the past 10 years property prices have gone through the roof, with average prices all but doubling.
But let’s not forget that equity release isn’t an ‘off the shelf’ product – many people will remember that lots of schemes were mis-sold in the 1980s. Happily now things are more regulated and the sector is booming again. MoneyExpert will take you through the process and help you make a decision on whether equity release is right for you.
What does it mean?
It’s all about unlocking capital that is ‘tied up’ in your home. You must therefore be a homeowner to consider equity release – if you’re not but you want to raise some cash, you might consider a personal loan .
If you are a homeowner and perhaps money is tight, equity release is one of many options open to you. Consider it carefully but don’t forget there are alternatives.
Option 1 – downsizing
It’s the most obvious way to make money from your property and doesn’t involve schemes and complicated regulations. It’s simple – you sell up, and then move to a smaller, cheaper property. In the process you ‘release’ some of the capital that was otherwise ‘locked up’ in your home.
For example, you could move from a 2-bed semi detached town house worth £300,000 to a 1-bed flat by the sea that is more appropriate for your needs. The new flat only costs £150,000, leaving you £150,000 to spend on a more comfortable retirement, minus the costs involved in moving, of course.
Option 2 – equity release schemes
Equity release schemes are financial products rather than a process like downsizing. They are designed to enable you to stay in your current home but still generate some money. If you use your property for equity release you will not be able to leave it to your family.
There are two types of equity release – home reversion and lifetime mortgage plans. They are different in how they work but in the end you either end up with a lump sum of money or a set of monthly instalments, and the amount you get depends on factors such as your age, health and the value of 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.
It’s important to take independent financial advice before committing to doing anything. In fact, research by MoneyExpert.com shows that people opting for equity release could pay £1,400 extra a year in interest just because of the choice they make.
MoneyExpert.com has a consumer comparison service for lifetime mortgages, listing 49 different products from around 18 providers.
The difference between the cheapest and most expensive lifetime mortgage shows there are genuine financial consequences to the choice you make. But cost is not the only consideration in what is likely to be the final large financial transaction you will ever make.
Look our for whether the provider you choose is a member of SHIP – "Safe Home Income Plans" – a voluntary body setting a code of conduct for members.
SHIP members are clearly marked on the MoneyExpert.com website so you should be able to tell which providers have signed up to a certain standard of service. All SHIP’s members offer a "no negative equity guarantee" which means if a customer dies they will never owe the company more than the value of their property – even if house prices fall.
All users of the MoneyExpert.com service are directed to take advice if they opt to take out a lifetime mortgage.