Equity release, also known as a lifetime mortgage, is a great idea if you’re more than 55 years old and would like some additional money to improve your home or garden, financially help your family out, or as an extra retirement income. Having an equity release helps you to free up tax-free money without having to sell your home and without paying any monthly installments. However, equity release is not recommended for everyone.
Releasing equity is gradually becoming popular as more people seek ways of increasing their income or receiving a lump sum to make their life more enjoyable. Considering that you’re dealing with probably your largest asset, this is not such a light decision to undertake. Fortunately, this article, written with help from Cardiff-based mortgage firm Eden Hawk, will help you to decide if you’d like to need to release equity in 2021 or not.
Advantages and Disadvantages of Equity Release in 2021
It is worth mentioning that the mortgage records decreased throughout the year 2020, while equity release rates are expected to increase in 2021. The main benefit of equity release is the absence of monthly installments. The major disadvantage of releasing equity is that the interest rates of releasing equity are quite higher than residential mortgages.
Also, since the interest is compounded, it tends to increase exponentially than regular mortgages. Whether the advantages will outweigh the drawbacks will be determined by your requirements. That is why you need to understand the advantages and disadvantages before your release equity.
- You can live in your house for your whole life.
- You still retain ownership of your property.
- You will benefit from an increase in your property’s value.
- There are no monthly installments.
- You will receive a lump sum of cash that is tax-free to spend in whichever manner you wish.
- You have the option of moving in the future.
- You cannot be owed more than your property’s value.
- The interest grows swiftly because you have to pay interest on the accrued interest.
- The value of your estate will reduce which in turn will affect the inheritance you leave for your family.
- Interest rates on releasing equity are higher which results in higher equity release costs.
- If you repay early, early repayment charges could apply.
Tips for Picking the Best Equity Release Scheme
- First, consider all your options.
- Consider the options for early repayment.
- Borrow only the amount of money that you require or pick a drawdown scheme.
- Consider inheritance protection options and interest repayments before choosing an equity release scheme.
- Seek independent advice from a professional equity release adviser.
What you Need to Know about Equity Release
- If you take a lifetime mortgage, there is no fixed time that you’re expected to pay back the loan. During your contract, the interest rates of your lifetime mortgage will not change, unless you selected a variable rate. The rate of interest that you will pay on your drawdowns will be calculated at the drawdown time and not when entering into the contract. If you take any extra borrowing, you could pay different interest rates.
- If you release equity from your property, you may not depend on the property for cash that you might require during your retirement, such as paying for long-term care.
- The amount of money that you will receive from releasing equity will impact your eligibility for state benefits.
- You will need to pay arrangement fees which depending on your arranged plan can be about £1,500 to £3,000.
- Whereas you can shift from your home and take the lifetime mortgage with you, you may not have sufficient equity in your house if you choose to downsize later on.
- Home reversion plans may not provide you with the right market value of your property as compared to selling your home on an open market. The reason for this is because you’re allowed to live in the house for the rest of your life which you could not do had you sold the house on an open market.
The concerns over mortgage repayments and recent changes to how pensions are calculated all indicate that equity release sales are increasing now more than ever. If you’re aware of all the facts and have already explored all the options and would like to enjoy your income comfortably knowing that it will decrease the inheritance you leave behind, then releasing equity could be your key to a more convenient life. Whichever option you choose, ensure that you consult a professional first to assist you in comparing various equity release schemes that are available in the market.