You may have recently seen, or heard about, equity release mortgages, but are unsure of what they are or if they are right for you. Is Equity Release a good idea for you?
Equity Release mortgages are a simple, and effective, way of realising the equity that you may hold in your current home. They are designed to release monies via a single lump sum, or regular drawdowns, with transparent and easy to understand payment terms. Critically, they are designed for 55+ candidates who may be asset rich, but cash/income impaired.
Let’s consider the advantages and disadvantages of equity release:
Advantages
Allow you access to money without the need to prove affordability/payback.
No payments required, so it does not affect your everyday spend.
Any money you release is tax free.
You can choose regular sums to top up your income or opt for a one off lump sum.
“No negative equity guarantee” – you will not owe more than the value of your home.
Disadvantages
You are borrowing money against your home. The debt may work out more expensive in the long term than downsizing.
Your entitlement to state benefits/grants may be affected.
Releasing equity will reduce the value you have in your home, and therefore the amount of inheritance you may wish to leave.
Early payback can be costly, and ideally should be treated as a “lifetime” exercise.
So, does this sound like something that you would be interested in? Let’s take a quick look at what you may need to consider beforehand:
- Plan your budget – Consider the items that you spend out on and picture what an “ideal world” looks like financially. Decide accurately what you may need finance for not just today, but also in the future, and be clear and realistic about how much will be suitable for you.
- Understand your debt – Ultimately you are borrowing money, and this must be repaid at some point. If you choose a “roll up interest” option, then be clear what effect this will have on the total balance, and how this can accumulate over time.
- Talk to your family – This form of mortgage is designed to be paid on death, and therefore can affect inheritance planning. Make sure your family are kept well informed, and make a collective decision (if you feel this is right for you).
- Is a standard mortgage more suitable? – You may be able to borrow more comfortably than you
realise, and on more conventional terms. Ensure that you consider all options before embarking on an equity release mortgage.
Article provided by Sam Harding, Managing Director of Pinnacle Finance