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Thinking of making some home improvements, want to buy a new car, take a world cruise or give a loved one some capital, perhaps to assist with a house deposit? Equity release may be right for you.
What is equity release?
Equity is the value of your home minus any unsecured borrowing against it. Equity release allows you to tap into some of that value without having to move out or downsize.
You can take the capital you release as a lump sum or draw down amounts as and when required. To be eligible for equity release you must be over 55 with a UK property worth at least £70,000. Criteria varies between providers and is focused on age, property value and property criteria.
It is not uncommon to find yourself house rich and cash poor, equity release is a way of redressing the imbalance. Over recent years there has been a significant increase in demand for equity release for example, in 2007, there was just 24 product options available whereas, as of August last year, there were 139 equity release schemes.
No need to move
Equity release is often the only method available for older people to extract funds from their property without downsizing or selling. This is particularly useful for those with interest only mortgages and no repayment vehicle. Funds released are tax free.
Low interest rates
Interest rates can be as low as 3.4% and are usually fixed for the life of the loan. This assures that borrowers know in advance how much will be owed in the future. The potential of the property’s value the borrower is looking to release would have the biggest impact on rates.
Avoiding Inheritance Tax
Releasing cash against the value of your home can be a way of gifting wealth to family members, free of Inheritance Tax.
The ‘facility’ option allows borrowers to have access to a pot of money for the future and not charge interest until it is drawn down.
The effect of compounding interest means that the outstanding balance owed can increase quite quickly for example, a typical rate of 4.5%, the outstanding balance will double within 16 years.
Unlike residential mortgages, where a borrower pays off the interest charges each month, the interest on equity release loans is usually added to the overall debt.
The early repayment penalties can be as high as 25% of the initial borrowing which can make it expensive to switch to a new cheaper deal. It is important to check the terms and conditions before taking out the plan.
Extracting cash could mean that any means-tested benefits – spectacles, dentistry, council tax and pension credit, could be impacted.
Downsizing is of course an option as a way of releasing equity in your property should you move to a property with a lower value. Having said that, yours may be a home where you have lived for years and you have many friends in the community. Don’t under estimate the personal and social impact of moving away if downsizing means moving out of the area. There is of course the financial cost of moving which can be high with estate agent’s and solicitor’s fees, removal costs and stamp duty to factor in.
4 equity release tips
- Don’t borrow the full amount you need in one go.
- Ensure you use a company that is a member of the Equity Release Council.
- Be aware how it could affect the benefits you are entitled to.
- Get advice before you do it.
At French & Associates Limited we have experts who can guide you through the equity release maize, so please feel free to contact us if you require assistance.