The Pros and Cons of Equity Release Schemes

As you approach retirement age, you have the security of a fully paid off mortgage, but may not have the income streams that you did in your youth. An unexpected expense can leave you searching for financial options at a time when you may be most vulnerable. A sudden illness or family emergency may quickly use up your savings, leaving you with few options.

An equity release scheme can be the answer for those who have paid off their home mortgage and are in dire need of funds. These schemes can unlock some of the money that you have paid into your home, so it is available to be spent on whatever you need. However, you need to be aware that equity release schemes are not the right financial solution for everyone, as they have some financial limitations that can affect you and your loved ones in the future. There are two main types of equity release schemes to consider: home reversion plans and lifetime mortgages.

Home Reversion Plans

A home reversion equity release scheme such as this one lets you sell a percentage of your home to the lender at below market value. You are allowed to live in your home for the rest of your life, without monthly repayment until the house is sold. At that time, the equity release provider reclaims their percentage of the sale price, plus any increase in its worth.

Home reversions are only available to you if you are age 65 or older. If you have beneficiaries who are set to inherit your home upon your death, the home reversion plan provider will take away the percentage that you sold to them, leaving your family members with less inheritance than they expected. However, some equity release schemes allow you to only withdraw money as needed, or on a monthly basis, reducing the overall amount of equity released.

Lifetime Mortgages

If you choose a lifetime mortgage, you will borrow against the existing equity in your home. Sometimes you can do a similar equity release when you first purchase a home that has a higher value than the sale price. With a lifetime mortgage, you will be accruing interest throughout your lifetime, without making any payments on the mortgage. Repayment happens when either the hold is sold or upon your passing away.

While no payments for the length of the loan seems attractive, interest can quickly eat up the value of your home. Look for lifetime mortgages that cap the total amount of interest at the home’s value, so you will at least break even. You can take out a lifetime mortgage starting at age 55, though the younger you are at the beginning of the mortgage, the more interest can accrue. Also, if you have a health condition which could decrease your lifespan, look for enhanced lifetime mortgage plans that provide a better interest rate.

Other Equity Release Scheme Considerations

Home equity release schemes can be expensive in the long term. It is impossible to predict your life expectancy, so the interest rates are capable of taking all of the value of your home. Also, interest rates on equity release schemes remain high, despite lower interest rate trends on most other financial products. You could be better served by taking out a small loan and repaying it quickly, rather than risking your home’s value to your heirs in the far future.

You may have to wait a considerable amount of time before you could consider early repayment of your equity release scheme. This can put tough restrictions on you if you wish to move or sell your house early. Once this period of time has passed, however, you can look for better deals and interest rates that can save you money overall.

A one-time or monthly payment from an equity release scheme can affect your qualifying for certain state benefits. Before signing up for an equity release scheme, consult with a specialist financial adviser who can help you evaluate your options and present financial scenarios in the event you do need an equity release scheme while on state benefits.

While an equity release scheme is not for everyone, it can be a source of funds or a monthly stream of income that helps relieve immediate financial pressure. Carefully decide if an equity release scheme is the right financial choice, or if you would do better by finding additional sources of income.

Paul graduated in 2001 with a degree in Finance. Since then he has gone on to work for several of the UK's most well-known financial institutions.

An avid blogger and a huge football fan, Paul is here to guide you through the ins and outs of personal finance and perhaps save you some money in the process!

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