What are the alternatives to equity release?

Written by Mathew McCorry

If you read my property blog now, that’ll be the end of it. I will not look for you, I will not pursue you. But if you don’t, I will look for you, I will find you and I will make you read it.

Are you looking into the possibility of equity release? We’ve written this guide which details what it is, whether it’s a bad idea, what the potential pitfalls are and whether you have any alternatives options, keep reading to find out more.

This post is on the longer side, so if you want to navigate to the section that best answers your question quickly, you can do so below:

What is equity release?

It’s a relatively straight forward concept; it’s the process of realising some of the money that you’ve built up in equity in your house over time as one lump sum of cash or sometimes several smaller amounts. The amount you take out of your home must be repaid at a later date, like a loan, but it can usually be more costly than your mortgage payments.

Equity release is typically only available to people over the age of 55; you don’t need to have paid off the full mortgage either. Releasing equity can be an expensive thing to do as interest as typically quite high, so you may want to explore other options before doing this.

Is equity release a bad idea?

We’re not saying equity release is a bad idea, it’s a viable option if you need the funds, but just like any debt it needs to be manageable, and you need to understand the cost of the repayments fully. You should only consider equity release as a last resort; you have several other options that may be more beneficial which you should explore before turning down this route.

What are the pitfalls of equity release?

There are a few pitfalls and things you should be aware of when you’re looking to release equity from your home, the main one being that the company that provides you with the equity release will not pay you full market value for the portion that they take.

There are a few other things that you should be aware of as well, which include:

You might lose benefits

If you receive any money from the government, you might see yourself lose it when you redeem an equity release scheme. Your monthly income skyrockets which could entitle you to lose out on specific programs like council tax reductions or pension credits.

Only take out the necessary money

A lot of people fall into the trap of taking out that little bit extra, as a just in case they need it type thing, however, you should only do it on a need basis. If you are withdrawing cash and don’t need it, it’s a waste of your own money as it will increase the interest payments.

Mounting interest bills

A common type of equity release is a lifetime mortgage where you borrow a certain amount against the value of your home at a specific interest rate, and it’s repaid at the end of the scheme which is when you die or move. As this can be a significant period, it can mean that the interest charges mount up quickly and your total debt could be a substantial amount of the sale of your home. However, most schemes offer a no-negative equity agreement meaning you or your family shouldn’t owe any more on the property and be in debt when that happens.

Missing out on house price rises

Another way of getting equity from your home is by selling a portion of it to a provider for a lump sum, also known as a home reversion plan. This means that when the house is eventually sold, the provider gets their share of the property, which means you won’t benefit from any property value rises from that percent of the share.

Limits on the amount you can release

The younger you are, and the healthier you are, the less you’re likely to be able to get released from your home. Equity release providers have to wait a long time before they get repaid, so they like to ensure that the repayment is significant after the build-up of interest.

What are the alternatives to equity release?

If you’re debating equity release, you should always ensure that you exhaust all your other options before doing so, due to how expensive equity release schemes can be in the long run. Here are a few of your alternative options:

Downsizing

This is by far the best way to free up some equity in your home, sell it, whether that be through the open market or a sell house fast company such as ourselves. This way you won’t be accumulating interest for years to come.

Letting out a room

If you have an extra room, this can be an excellent way to bolster your monthly income. There’s a Government-backed rent a room scheme that you should look into; you can earn up to £7,500 per year without paying tax from letting out furnished accommodation, although you will have specific responsibilities you have to fulfil as a landlord.

Better budgeting

Make as many cutbacks and savings as you can, switch energy companies, cancel that expensive Sky TV package and get a water meter installed. There are a lot of things you can do to cut down on your monthly expenditure that might be able to save you enough money, so you don’t have to release equity.

Sell other assets

Do you have anything else you can sell? A couple of bikes in the garage, or even better your car? You should always look to raise funds in any way you can before turning to equity release also if it means selling some of your luxury items.

Look into a bank loan

Your bank may still lend to you, and the interest rate you can get from your bank will be far cheaper than getting equity release. Your bank are also quite likely to loan to you as they will know your credit history and affordability.

Part-time work

You might want to consider getting a part-time job to make a bit of extra money every month. A few hours here and there will make a significant difference and may mean you can avoid equity release.

Local authority grants

Sometimes your local authority may allow you to use grants to help with home improvements; it’s definitely worth asking the question.

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