Equity Release

Equity release allows homeowners to take out a loan against money tied up in their home, with the debt being paid back after their death or when they move into long-term care. A 'no negative equity guarantee' ensures that a borrower will never owe more than the value of their home.

There is a ‘ticking time bomb’ in the equity release mortgage sector, with companies significantly undervaluing the 'no negative equity guarantees' they offer borrowers, a new report claims. Equity release can be the right solution for some older people who are looking for a cash lump sum or extra regular income, and for those who want to move to a smaller, less expensive property. However, there are a number of potential pitfalls and issues to be aware of if you are thinking of taking out an equity release deal in the UK.

Equity release allows homeowners to release cash from their property without having to move. Borrowers can take the money in a lump sum, as drawdown or as a home reversion plan. A drawdown plan allows borrowers to take small amounts at different times up to a limit, whereas a lump sum involves taking out the entire amount all at once. A home reversion plan involves selling a portion of the property to the provider in exchange for cash while retaining the right to live in it.

This means the size of the debt can increase very quickly and people considering equity release must get professional financial advice beforehand.

Although equity release looks like a profitable way to end all of your problems, it can cause endless problems in the near future. Most elderly people face these problems as soon as they purchase an equity release plan:

What are the problems with Equity Release plans?

• It can double the debt - The effect of compounding interest means that the outstanding balance owed can rise quite quickly. With a typical 4.5pc rate the debt will have doubled within 16 years. Some borrowers who took out plans in the 2000s, with rates often upwards of 7pc, are now paying five-figure sums in interest charges each year.
• There is no exit - The early repayment penalties can be as high as 25pc of the initial borrowing. These can make it very expensive to switch to a new, cheaper deal which leaves you a prisoner to your current provider. It is important to check the terms and conditions before taking out the plan
• Benefits hit - Extracting cash could mean that any means-tested benefits, spectacles, dentistry, council tax and pension credit could be impacted. You could lose your entitlement to them.
• Once and done - No other loans can be taken using the property as security.

Living Freedom - a dignified solution