Six reasons why you should speak to an equity release adviser
Equity release can help you to unlock cash tied up in the equity of your home during your retirement. Taking advice is compulsory when applying for equity release and an experienced advisor can help you to determine if equity release is the right decision for you.
Equity release can help to provide cash for lots of reasons, for example you may want to access some money to pay off your mortgage and free up your monthly budget. It may be you need to make adaptations to your home so you can remain living there safely. You may want to take a dream holiday, buy a second home or help a family member with a deposit for their first home. The reasons to take equity release are wide ranging whichcombined with the growing number of equity release products and the potential for wide ranging fees can make choosing equity release very complicated. A good equity release adviser will help you to understand these complexities along with the risks and benefits of taking equity release. They will be able to recommend if equity release is right for you and the products that best suit your needs.
We cover six key reasons why you should speak to an experienced equity release adviser:
Equity release comes in two forms, lifetime mortgages and home reversion plans. The most common type of equity release are lifetime mortgages. A lifetime mortgage most often has a fixed interest rate and unlike a regular mortgage you don’t need to make regular payments (unless you want to). If you don’t make any payments, then the interest charged is added to not only the initial amount you borrowed but also to the interest accrued. This means you are paying interest on interest and the amount you have borrowed can soon increase significantly. A home reversion plan is when you sell a share of your home to an equity release company. Our guide to equity release explains more about the differences between these two types of equity release.
Our product data shows there are now more than 400 lifetime mortgages available representing a significant increase on the 40 or so that were available five years ago. In addition, the product features available have also increased for example, you can choose to have an initial lump sum and then a reserve fund. A reserve fund is a sum of money the equity release lender agrees that you can drawdown later. The benefit of this is that you will only start to pay interest on the reserve when you decide to take it. You should avoid taking more money than you need to avoid the extra interest costs.
An equity release adviser can help to identify those lifetime mortgages with the most competitive interest rates, lowest fees and product features. If you think you may need more money in the future, then a lifetime mortgage that allows you to agree a reserve fund that you can draw upon later will reduce your overall interest costs.
A lifetime mortgage can be expensive if interest rolls up over many years, potentially decades before it is repaid when you go into long term care or you pass away. The interest is added to the amount you borrowed and then any interest already charged, this means the interest is compounded. The risk of this is that when the lifetime mortgage is due to be repaid, the amount outstanding is greater than the value of the property. However, equity release lenders that are members of the Equity Release Council offer a no negative equity guarantee. This means you will never owe more than the property is worth. An equity release adviser can give you a projection of how your debt will build over time.
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If you are claiming means tested state benefits your equity release adviser will be able to tell you the impact taking equity release might have on these. Examples of means tested benefits include pension credit and council tax credit. If you are receiving the state pension this should not be affected. There is usually a fixed maximum amount of savings that you can have before means tested benefits are removed. If you take equity release and this is added to your savings, you may find your means tested benefits are impacted.
Equity release is not regarded as income, this means that you can receive equity release tax-free and not pay income tax on it. However, any money invested or placed into savings would fall under the Personal Savings Allowance rules. This allows you to earn income from savings and investments of up to £1,000 for basic rate taxpayers and £500 for higher rate taxpayers without paying tax. Any earnings over this would need to have tax paid at the relevant income tax rate.
When you take out equity release this will reduce the value of your overall estate and the amount your family or beneficiaries can expect to inherit when you die. Some lifetime mortgages allow you to ringfence a guaranteed sum of money from your property to be protected as an inheritance for your family.
A good adviser will look at the alternative options to equity release and will check if these are more suitable for you. Downsizing, remortgaging your property, continuing to work, using pension drawdown, availability of government grants for adaptations and applying for unclaimed state benefits all could be more suitable depending on your circumstances.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.