Equity release: Ten things you need to know and questions to ask

An increasing number of older homeowners are using equity release to fund retirement, boost their finances in later life, and improve their homes.

A growing number are also cashing in on the value of their home to pass on an early legacy and help loved ones.

But before you start releasing equity, it’s important to understand a few key things, know all the risks involved, and realize that despite low rates, it can turn out to be expensive in the long run.

If you’re considering releasing equity, this 10-step guide can help you better understand what’s possible.

> Quick Link: Compare equity release rates and how much you could borrow

What is Equity Release?

Equity release allows those wealthy in assets but low on cash to use the value of their home in retirement — or as they approach retirement — by taking out a loan to be repaid after they die.

There’s no need to make monthly payments with a release of equity like you do with a mortgage, but this can lead to a downside if interest rates rise over the years.

That means releasing equity leaves less for your loved ones as an inheritance, so it may be worth looking at alternative ways to generate income.

It is possible to mitigate this with modern equity release loans by choosing to gradually withdraw money through a process known as withdrawal (in which the interest charged on a lump sum that is paid in one withdrawn is limited) and in some cases monthly interest payments may be made.

Before releasing shares, it is essential to obtain professional financial advice. And if you’re thinking about it, be sure to read our ten points of interest below.

1. Can you downsize?

Consider all alternatives first, such as moving to a smaller home. Capital raised in this way will cost you less in moving costs than it does in startup costs and equity release interest.

2. Talk to your family

If you don’t want to move, it’s essential to discuss your plans with your family before proceeding with the equity release. This prevents unnecessary family surprises later on and they may be able to suggest alternatives.

3. Receive professional advice

With many equity release schemes available, it will be difficult to find the best deal on your own. Not only that, many of the schemes are only available through authorized intermediaries. So look for an independent specialist in share release advice.

4. Choose your advisor carefully

What do they charge, do they compare all the deals on the market? Can they also advise on pensions, the right to social assistance and the financing of long-term care? Some of this may be relevant to you now or in the future, and wrong advice could cost you dearly. This is Money has a carefully selected equity release partner Age Partnership, who can help explain your options, Download the free, no-obligation equity release guide here.

5. Learn about fees

Ask your advisor about equity release fees – and make sure you get your money’s worth.

The impact of compounding interest on an equity release plan is particularly important to be aware of.

Savers’ best friend, borrowers’ downfall, the effect of compound interest is really what drives up the cost of releasing equity.

Interest rates on equity release plans are now lower than ever, but are usually at least 4 to 5 percent. The mortgage interest rate, on the other hand, is below 2 percent.

Rolling up interest when releasing equity can be expensive.

Say you borrowed £50,000 at 5 per cent. In the first year, you accrue interest of € 2,500.

In the second year, you would then pay interest on the original £50,000 plus on the additional £2,500 that had increased your debt (£52,250) – so a total interest of £2,625. This is then also added to your debt, bringing it to £55,125 after three years.

This continues and in ten years you would owe £83,350.

This is why equity release plans include a guarantee that you will never owe more than the value of your property, but that also means that borrowers can only take down smaller amounts against the value of their home than they would with a traditional mortgage .

One way to keep costs low is to pay off the interest over time. Choosing to pay back just £100 per month could make a big difference – in the example above, only half the rate would be charged.

You should also find out what happens if you find that you can no longer live at home and have to move to a care home.

6. Only borrow what you need

Only borrow as much as you plan to spend or spend. You will earn much less from cash on deposit than the interest you have to pay to borrow it in the first place. It may also reduce your entitlement to an income-related benefit.

You can also consider a withdrawal plan that offers a cash reserve facility. Instead of just receiving a lump sum, you have the option to release your money over time, as and when you need it. Because interest is only paid on the money you withdraw, these plans can often prove to be more cost-effective.

7. Pay attention to the APR

When comparing lifelong mortgage rates, always pay close attention to the APR [annual percentage rate] taking into account the total cost of borrowing over a year, including any charges – and not just the nominal rate. The difference can amount to 0.5 percent on the actual rate charged.

This is due to the costs of setting up the scheme and the way the interest itself is calculated.

This can be daily, monthly or yearly. The longer the period, the better it is for the borrower. (The exact opposite is true for traditional amortization loans.)

8. Do you understand the product?

Ask your advisor for further support and advice. This can vary from claiming social security benefits, or care and support from the municipality, to reducing inheritance tax. Advisers who specialize in advising the elderly will be better able to help than, for example, a traditional mortgage adviser.

Make sure you understand the different features of stock release plans and which ones are most important to you. If you’re planning to take out a lifetime mortgage, how do setup costs differ from plan to plan?

Are you planning to move in a few years or is there a chance that you will want to repay the loan in full or in part in the future? Do you want to be sure that part of your assets is protected so that it ends up in your estate?

A good consultant should be able to discuss all the features of a plan in a way that you can understand.

9. Get legal support

You need a lawyer. If you have one, be sure to ask if they are familiar with the stock release paperwork. Otherwise, the process could take longer and cost you more. There is now a considerable number of lawyers who have completed additional training in this field. Your equity release advisor should be able to suggest such a company to you.

10. Know your goals

Make sure you have a clear idea of ​​your main goals when you embark on this path. Your personal priorities and views on the direction of house prices will have a material impact on what is right for you. Your equity release advisor should be able to guide you. If not, seek alternative specialist advice.