Equity Release - the Pros and Cons

Have you reached that time in your life when your savings have dwindled, money is tight and you need a cash lump sum or source of income?

This could be for a variety of reasons: essential repairs to your property, a Pension shortfall or maybe you just want to go on a holiday of a lifetime.

An Equity Release Lifetime Mortgage enables you to tap into the equity in your home without having to move house. The Equity Release Company will loan to you a percentage of the value of your property as a lump sum or income and the loan will be registered against the property at the Land Registry as a Legal Charge.

There are, of course, benefits and pitfalls of entering into an Equity Release Lifetime Mortgage and we set out below the Pros and Cons to assist in helping you to decide if Equity Release is right for you:-

Benefits:

1. The mortgage is usually designed to run for the rest of your life with no repayments to be made by you for the duration of the loan;
2. A cash lump sum will be available to you to use as you wish;
3. You retain ownership of your home until the loan becomes repayable either on the death of the last borrower (if a joint loan) or if you go into long-term care;
4. Most Equity Release Lifetime Mortgage lenders have a no negative equity policy, whereby if the value of your property falls below the amount repayable to the lender, once the property is sold after your death your Estate will not have to pay back any more than the value of your house at that time.

Pitfalls:

1. It will greatly reduce your Estate proceeds on your death. You should discuss the Lifetime Mortgage with your family and any heirs/beneficiaries so that they are aware your house will have to be sold to repay the loan after you have passed away or moved into long-term care;
2. The loan may affect any benefits to which you are entitled, i.e. Pension credit or Council Tax benefit;
3. The lender will have the right to repossess the property if you do not comply with their requirements of keeping the property in good repair and fully insured;
4. An Equity Release Lifetime mortgage can be very expensive. Very high interest rates apply and often the full value of the property will become repayable due to the compound rates of interest which accrue on the amount repayable over your lifetime. For example a £40,000 release of equity cash sum after 10 years will have increased to around £79,000 to be repaid and after 25 years to around £220,000. (All lenders' rates differ.)

If an Equity Release Lifetime Mortgage is not suitable for your needs you could, of course, consider downsizing your property and move into a smaller home to release some equity.

Another alternative would be an Equity Home Reversion scheme, whereby you surrender a percentage share in your property to the Home Reversion Provider based on the current value. The amount that you receive, however, will be much less than the actual share that the Provider acquires, e.g. for a 50% share in the property they may pay over to you 20% of the value. However, on any future sale, the Provider would be entitled to a full 50% share of the market value of the property when sold.

An unsecured loan may be another alternative if you are able to meet the repayments from retirement income, or a mortgage extension if you still have a mortgage, or you may even be entitled to benefits or a Grant if you are on a particularly low income.

Whatever your circumstances, if you need advice or guidance on any aspect of property ownership or to discuss the possible options available to you when re-financing, we will be happy to advise you. Contact our Conveyancing team on 0113 264 4414.