Are there any Problems Associated with Equity Release?
What is Equity Release?
There are typically two different types of equity release schemes. First, there is the lifetime-mortgage scheme, which allows you to keep full ownership of your home. It works by providing you with a loan, with accumulated interest, which you need to repay during the sale of your home. Typically, this will occur when you die or move into later life care.
Second, there are home-reversion schemes, where you sell either a part or the full ownership of your home. You are then provided with a lease to live rent-free for the duration of your lifetime. In this scheme, the reversion company is paid as you move out.
Although an equity release can be a great way to increase your income or have a bit of extra money at hand, there are some problems related to equity release.
1. It Can End Up Being a Costly Option
Although the idea of an additional income may sound lucrative, the terms of the deal might prove to be more costly in your situation. For instance, a lifetime mortgage provides you a loan with interest, and the interest can quickly add up. On top of this, with the home-reversion scheme, you will get a lot less than the market value of your home, which might mean you are better off just selling the property and moving somewhere else.
2. Losing Out on Benefits
Another equity-release pitfall is the possibility you might lose your benefits. If you receive anything from Pension Credits to Council Tax reductions, you might lose these benefits as your income increases.
Therefore, you want to check your situation by using the Government’s benefit calculator or by talking to a financial adviser first. Your additional income might end up shrinking your total income by removing your entitlement to certain benefits. Remember any money you keep in savings from equity release will also need to be accounted for and declared with benefits in mind.
As well as keeping in mind any benefits you receive now, you need to consider any benefits you might be entitled to in the future. Perhaps you don’t receive Pension Credits now, but you might be entitled to them in the future.
3. Inflexibility if You Wish to Move Out
Another problem with equity release can be the inflexibility of the deal. If you wish to have someone else move in with you later on, you need to check whether they are entitled to continue living on the premises in case you die. In addition, family members may not be able to stay at the house if you need to move into long-term care.
In regards to the lifetime-mortgage scheme, you might have to repay the loan back if you decide to move out in the future. Your financial situation might also change and you might find it difficult to deal with the repayments.
4. Consider What You Want to Leave Behind
You also need to consider what you wish to leave for your children or grandchildren. Lifetime-mortgage schemes tend to mean that your relatives won’t receive as much money from selling the house when you die. With the home-reversion scheme, they might not receive anything, if you sold off the total ownership of your home.
Discuss Your Situation with a Financial Adviser
To understand how these common equity-release pitfalls might influence your situation, you should discuss any possible deals with a financial adviser. It might be that the above equity-release problems don’t apply to your situation and that equity release is a viable alternative for you. You need to be aware of these issues before you make a final decision.