Is Equity Release a Good Idea?
With falling stockmarket returns and falling pension annuity rates, many people are struggling to cope with the costs of retirement.
For homeowners, equity release schemes offer a convenient way to release some of the money tied up in your property now, instead of leaving to sell it and trade down to a cheaper alternative. But do equity release schemes offer good value?
Equity release schemes have been increasingly popular over the last decade, as the costs of living for pensioners has increased and house prices have also risen. The schemes are designed to pay for the former, with the latter.
There are three types of equity release scheme available, lifetime mortgages, home reversion plans and sale-and-rent-back plans.
Lifetime MortgagesWith lifetime mortgages, a homeowner is able to take out a loan on a property in order to raise a lump sum, to spend however they choose.
The interest payable on the loan is repaid from the sale of the house when the homeowner and/or their partner dies.
If the sale of the house more than covers the loan, plus the rate of interest, then the remainder goes into the homeowner’s estate, and can be distributed through their will.
However, if the sale does not cover the cost of the loan and interest amount, then the equity release company will have made a loss – the debt dies with the homeowner.
Another example of the lifetime mortgage is ‘drawdown’. This simply means that instead of the homeowner taking a large lump sum, they can choose to take the cash out in stages as and when they need it. This type of scheme helps to keep the interest charges down to a minimum.
‘Home Reversion’ SchemesWith home reversion plans, the homeowner is able to sell a share of their property, in exchange for a lump sum payment. When the homeowner dies, the company will receive their share back through the sale of the property – most importantly, at the value of the property when it is sold.
So, if a homeowner agrees to take a 30% lump sum on a property worth £300,000, they will receive £90,000. However, if the value of the property rises to £350,000 when it is sold, the company will be entitled to take 30% of the higher value of the property, or £105,000.
If the property value falls to £280,000, the company will only receive £84,000.
‘Sale-and-Rent-Back’Companies who specialise in ‘sale-and-rent-back’ schemes offer to purchase a homeowner’s property for a sum less than the market value (usually around 75%).
The company pays all the necessary legal costs to complete the sale, and they then rent the property back to the former owner.
The homeowner is free to use the cash payment they receive to settle their mortgage and any outstanding debts, and in doing so they get to remain in their own home. Some sale and rent back plans can also offer homeowners the opportunity to buy back the property at market value at a later date.
Selling your property at a loss is not a very palatable business deal, any the demand for these sort of schemes is usually with people who are facing repossession and with large personal debts that need to be repaid very quickly.
Most sale-and-rent-back companies claim to be able to complete the transaction within a week if necessary and they aim to be as discreet as possible.
Equity Release ConcernsThe major concern with equity release scheme is that they ask homeowners to give up a lot of the value of their property, in exchange for a relatively small lump sum amount.
You should therefore think long and hard about the implications such a decision would have for you, and your family. Trading down to a smaller property may often be a better alternative.
Whatever you decide, discuss your financial situation with your family before proceeding with equity release. This will avoid any unnecessary family surprises later on and they may be able to suggest alternatives.