Will a Release of Equity Make Matters Worse Over the Long Term?July 1st, 2014
What is equity release? Equity release is a financial product that allows you to release the cash that is tied up in your property. Its advantages include that you can drain financial liquidity from the bricks and mortar of your home. It is geared towards people who are in retirement and want to have extra cash to improve the standard of living. However a release of equity in a mainstream loan is also possible.
A release of equity requires understanding what is going on in the financial services market and studying the property market to look at the fluctuations of property prices.
The key thing to remember about equity release is that as you are borrowing money against your home; you are incurring interest that is being ‘rolled up’. This means it is compound interest that is building up over a set amount of years. These types of equity release plans are known as roll-up lifetime mortgages.
The way the interest is repaid is either when you sell your property or if you go into long-term care. The drawback of this option includes that you might not be able to pass on any potential inheritance onto your children, if your property does not sell for the amount that you want. This means that the value of your estate could be lower and this is especially important to understand if you want to include several beneficiaries.
Advantages of Advice
To avoid all of this, speaking to an independent equity release adviser is the way to go. Advantages of using independent equity release advice include:
– You know what to expect: Lifetime mortgage advisers can assess your current financial situation alongside other factors to see how much money you could realistically borrow against the value of your home.
– Understanding the tax implications of equity release: Another benefit of using lifetime mortgage advisers is that they can help you understand what the tax situation is with equity release. They can go into detail about how much tax free cash can be generated from equity release because of their experience and knowledge in the sector.
– Independence: You get impartial advice on the FULL range of equity release loans that are available. This will help ensure that the product selected is best for YOUR circumstances and not just the advisers. Always choose an equity release loan from a company that is a member of the Equity Release Council.
Different Products on the Market
While the above roll-up lifetime mortgage was mentioned it is important that you understand there are distinctions between products. The roll-up loan is a lump sum payment. You also have two other options that roll up the interest till the end of the loan.
Drawdown lifetime mortgage offers you a smaller lump sum at the beginning. You then have an account you can draw on as you need funds. The amount you withdraw is going to have compounding interest attached. Any unused portion is still considered a part of the estate and thus not part of the interest accrual. It can keep the amount you owe down and leave a potential inheritance behind.
The second option is enhanced lifetime mortgage. This is for individuals with a history of illness which may reduce life expectancy. Such ailments would be cancer, heart attack, diabetes, high blood pressure etc. A larger lump sum is provided with an enhanced lifetime mortgage at the outset, with a thought that the mortgage will be repaid earlier than the standard roll up.
Now there is one other choice that is not a roll up type of mortgage for retirees. This is called the interest only lifetime mortgage. It is designed for you to pay interest each month and keep the principle balance unchanged until you die or pay it off.
Home Reversion offers Equity Too
The discussion has focused mainly on loans for retirees. However, you do have another choice. You can take on home reversion in which you sell all or part of your home. The home is no longer in your family, but you get to live there and you still own a portion of it. Since you own a little of it when that part is sold you get to leave an inheritance. You also have no loan or interest to repay at the end.
Choosing equity release as a way to have an income in your later years is a big decision. It will be easier to make a decision as to whether equity release is a benefit or a burden in the long term when you hear impartial advice. Learn more about release of equity by speaking with a representative today.