Is equity release a good idea? What’s the alternative?
Helping you to answer 'is equity release a good idea?', as well as how much equity you can release and what the better alternatives may be...
As humans, we always want more than we have. We could always do with a bit of extra cash for a holiday, or some shopping, or even to pay for care.
Equity release makes this possible, allowing individuals to get access to some of the equity tied into their house, without even having to move.
But is equity release a good idea? Is it possible for it to go very wrong?
Look no further for the answers you need…
We’re going to help you answer, ‘is equity release a good idea’, as well as go through all the pros and cons of equity release. We’re also going to give you some alternatives to equity release, which you may even think sounds like a better idea…
What is equity release?
The equity in your home is the total market value of your property minus the amount of house repayments you haven’t paid off yet. Equity release allows you to access some of this money without selling your house.
Equity release will provide you with a lump sum, or several small amounts of cash, of some of the equity in your home whilst you can continue to live in your home. Some people take part in an equity release scheme to be able to go on a dream holiday or pay for care. Equity release gives people the opportunity to do this, without having to leave the home they love.
The amount you release from your home will need to be paid back over time, with the repayments having interest, so you’ll need to be aware that you will end up paying back a lot more than you initially received.
How does equity release work?
So now you know what equity release is, you’re probably thinking okay great, but how does equity release work? Great question – let us help…
You will need to find an equity release provider and scheme which is suitable for you. They will provide you with either a lump sum, several smaller payments, or a combination of both.
There are two different options when it comes to equity release, and these are:
Lifetime house repayments
A lifetime mortgage is the most common form of equity release in the UK. This allows individuals to borrow a lump sum in the form of a mortgage, allowing the individual to stay in the property, providing it serves as the main residence.
The amount you’re able to borrow is normally between 18% to 50% of the property’s total value and the older you are, the more you can release.
As the equity release is in the form of a mortgage, there will be interest, meaning you will end up paying back a lot more than you initially had paid out.
When an individual dies or moves into long-term residential care, the house will sell in probate and the money made will go towards the repayments.
Individuals who take this equity release route have the option of making payments on the house repayments or allowing interest payments to be collected as part of the debt.
You may be able to qualify for an enhanced lifetime house repayments if you have a serious health condition or an unhealthy habit, such as smoking. An enhanced lifetime mortgage may allow you to be able to borrow more or pay lower interest.
Home reversion equity release allows individuals to sell part of their house to a reversion provider, whilst still being able to live in the property. The provider will either give you a lump sum or periodic payments for the part of the property which you have sold.
The homeowner can continue to live in the property, without having to pay rent on the part of the property sold. One thing to bear in mind, however, is when selling the part of the property you won’t receive the full market value.
For example, if you sell a 40% share in a £100,000 property, you will get a lump sum of £20,000. This is obviously £20,000 less than what the share is worth. The provider does this as they will have to wait years to get their money back.
When the individual dies and the house is eventually sold at £300,000 (just as an example), then the equity release lender will be entitled to £120,000, as this is a 40% share of the sale proceeds.
Not everyone is eligible for equity release, as there are certain conditions which must be met in order to qualify, and these are:
For a lifetime mortgage, you will need to be at least 55 years old
For a home reversion plan, you will need to be at least 65 years old
You must own the property in the UK, as your main residence
Your property must be in a reasonable condition and over a certain value, with some restrictions on the type of property accepted
If you have a mortgage or secured loan on your home, you may still be able to get equity release, depending on the value of your house and the amount outstanding. You will have to pay off any outstanding amount as well as paying off the equity release
Equity release may not be a suitable option if you have dependents living with you. They will need to sign a contract to say they understand that they don’t have the right to continue living there if you die or go into long-term residential care, meaning taking equity release whilst living with dependents offers them very little protection
How much equity can you release from your property?
Most people tend to release between £10,000 to £100,000, with £10,000 being the minimum amount you can release as a provider wants to make sure it’s ‘worth it’ for them financially.
The maximum amount you can release from your property, according to Money Advice Service, is 60% of the value of your house, with the exact amount depending on your age, house value, property condition and type of property.
How much do you pay back on equity release?
If you choose the equity release option of a lifetime house repayments, you will need to make repayments over time, with the borrowed amount gaining interest.
Each year, the maximum amount you can repay is 10% of the initial amount borrowed. You can repay in up to 4 instalments each year, but every payment must be a minimum of £500.
The interest paid is something called compound interest, which results in the amount of interest racking up quicker, as, essentially, you’re having to pay interest on interest. The rate of compound interest you have on your loan will play a huge role in how much you have to pay back.
To give you an idea of how much compound interest can really rack up take a look at the tables below…
Based on an annually rolled up lifetime house repayments loan of £50,000 with a compound interest rate of 4%:
|Year||Interest (at 4% rate)||Total owed|
Based on an annually rolled up lifetime house repayments loan of £50,000 with a compound interest rate of 5%:
|Year||Interest (at 5% rate)||Total owed|
Based on an annually rolled up lifetime house repayments loan of £50,000 with a compound interest rate of 6%:
|Year||Interest (at 6% rate)||Total owed|
Figures from all tables taken from SunLife
Yes, if you borrow £50,000 at 6% compound interest, after 50 years you will owe £119,831, more than double what you borrowed… Yes, we know you’re thinking ‘is equity release a good idea?!’ after reading those figures. Well, lucky for you we’re getting onto that next!
Is equity release a good idea?
So you’ve seen the figures above and had a read of some equity release horror stories, and now you’re thinking ‘is equity release a good idea? Should I even go down this route?’
Whilst there’s no right or wrong answer, we want to help you find the answer which is right for you. Let us take you through the pros and pitfalls of equity release, to allow you to answer the ‘is equity release a good idea’ question yourself…
Don't need to move house - possibly the biggest 'pro' of equity release is it allows you to stay in the house you love
Don't have to pay back the money until you go into long-term care or pass away - depending on which equity release scheme you go down; some options allow you to not have to pay anything back until you’ve passed away or gone into care
Gives you freedom to use money as you please - probably the main reason you’re looking at equity release is to get some spare money to pay for something you need (or want)
Reduces value of estate - if you choose to go down the home reversion route, you're selling some or all of your property to the equity release provider, reducing the value of your estate. Your estate is everything you own, including money, property, investments and possessions, and goes to the people named on your will
Home reversion plan means someone else owns all/a share of your property
Reduce entitlement to benefits - this can be either now or in the future
Extortionate interest repayment amounts - you will have seen this earlier in the tables we showed, but the interest repayment amounts can lead to you paying more than double the amount you originally got (ouch!)
Miss out on market value - if you choose a home reversion plan, you won't receive market value for the share you're selling
Early repayment charges - if you are in a position of being able to repay the amount you borrowed early, you will have to pay a fee. This is because equity release providers don't actually want you to pay early, they want as many years as possible to go by to allow the interest to build up
Is there a better alternative to equity release?
If you want to get some cash for your home, you do have other alternatives besides equity release; you could redoing house payments your property or sell up and move on.
redoing house payments is the process of moving your current house repayments from one lender to another, or from one product to another with the same lender.
redoing house payments will allow you to borrow more money, whilst still remaining in your property, which may sound like a ‘win win’. But you will need to keep in mind it’s not all as easy as it seems…
Firstly, not just everyone can redoing house payments their property. When applying for a redoing house payments with a new lender, you will be treated like a new applicant and will have to go through all the checks and paperwork again.
Not only will you have to give evidence of your income, but the lender will also analyse your current loans, credit cards, and any bad spending habits, so not everyone will be approved.
You will also likely be charged an early repayment fee, which means that redoing house payments isn’t a plain sailing, fee-free process. On top of this, redoing house payments can take a number of weeks to complete, so it’s not an easy way to get your hands on ‘quick cash’.
Sell your house
A better alternative to equity release, when you need some cash ASAP, is to sell your house. Naturally, as you want to get your hands on the cash ‘tied into’ your home as quickly as you can, you will want to look at your options for a quick house sale.
At auction, once you strike a deal with the highest bidder, contracts are exchanged and the buyer has 20 to 28 days to complete, much quicker than what you would get on the open market. However, even though contracts have been exchanged, the buyer is still able to pull out and forfeit their deposit, so there’s no guarantee an auction will help you get your hands on quick cash for your property.
With a sell house fast company, all you need to do is say ‘I need to sell my house ASAP’ and they will give you a cash offer, which you could have in your bank in a matter of a WEEK, something the open market really can’t promise. Also, unlike at auction, once you’ve accepted the cash offer, they’re a guaranteed buyer, meaning your sale won’t fall through.
At both auction and sell house fast companies, you’re only selling to serious buyers, meaning no time wasters (wooo). This means you can get your house sold and hands on the cash you need faster than you know it.
Sadly, at auction, you will have to pay a commission of the sale price to the auctioneer, alongside having to pay for advertising and marketing costs AND room hire. You will also have to cover all your own fees, meaning the amount of equity you will release from your property will be limited.
At a sell house fast company, you don’t have to pay for anything. Basically you’re selling your house for free, avoiding all costs – unlike redoing house payments or at auction.
Also at auction, the process isn’t always quick and easy, with some properties taking up to 10 weeks to complete at auction. There’s also no guarantee your house will sell at auction, unlike at a sell house fast company.
Want to get yourself a guaranteed quick house sale to get your hands on cash ASAP?
We can help you with that!
At The Property Buying Company, we will buy your house for CASH, in a FAST timescale of your choice. Our average completion time is 2-3 weeks, but we have been known to complete in as little as 7 days.
We will cover all the costs associated with selling your house, including the legal fees, meaning the offer you get is the amount you will get in FULL in your bank. We only require one quick viewing of the property to make sure our offer is as accurate as possible. We’re also a guaranteed buyer, no sales falling through here!
Stop endlessly thinking ‘is equity release a good idea’ and sell your house to us! Give us a call or fill in our online form to receive a no-obligation cash offer which we could have in your bank as soon as next week…