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Written by Neil Barsby – SimFin’s Equity Release arm Asquith Financial Services

If you are a homeowner considering an equity release to supplement your pension income, it is important to weight up the pros and cons of signing up for a plan. An equity release is only available to homeowners aged 55 and upwards. This is big decision that entails strong financial commitments for you and your family. If you are wondering about the advantages and disadvantages of equity release, we go into more detail below.

ADVANTAGES

AVOID THE NEED TO DOWNSIZE

An equity release scheme allows you to take money out of your own home while still living there, removing the need to downsize in the process. This means you do not have to go through the upheaval of selling up, moving to a smaller property and using the difference in price as a way to buffer your pension income. In your later years you want to be able to look forward to life in a home you are comfortable in without having to deal with the stress and extra expense of moving.

LOWER MONTHLY OUTGOINGS

The money released through an equity release does not generally have to be repaid until you either move into long-term care, or pass away. This also includes the interest attached to the equity. Aside from the initial advice or set-up costs, your equity release plan won’t cost you a thing until that point. The equity release will however have the cost income roll-up.

RELEASE THE MONEY WHENEVER YOU WANT

There are some providers who will allow customers to access a ‘drawdown’ service. This enables them to release the equity whenever it is needed. Whether you choose to receive one lump sum, or regular payments to supplement your income, they are both completely tax-free.

When you are required to pay back the money, the interest is only charged on the amount that has been released, keeping interest bills lower and more manageable.

DISADVANTAGES

A SMALLER FAMILY INHERITANCE

One thing to keep in mind when signing up for an equity release is that some of the value of your property will have to be used to repay the provider when you either move into care or die.

The knock-on effect is that your relatives are more likely to receive a smaller inheritance than you may have expected. In the case of a home reversion plan they have already sold part or all of the property.

Taking out an equity release policy may not necessarily reduce your family inheritance. Rising house prices may offset the impact of the interest that may be rolled up as part of the product.

HOUSE PRICE RISES

If you have chosen to take up a home reversion plan, this entails selling part, or all, of your property to the equity provider. Should the property market continue to blossom and house prices get even higher, you and your family will not be in a position to benefit from this on the portion of the property that has been sold. Whereas the ownership of the property is retained with a lifetime mortgage.

GROWING INTEREST CHARGES

Interest charges will continue to build up the longer you lend money through an equity release plan. When you reach the end of the plan this could mean your family end up owing the full value of your home to the equity release company, unless interest payments have been made during the term.

The good news is that reputable providers will usually offer a ‘no negative equity guarantee’. This ensures that the amount customers owe will never exceed the value of their home.

ARE YOU CONSIDERING EQUITY RELEASE?

If you are thinking about signing up to an equity release scheme, it is highly recommended to talk to a local financial adviser. If you enjoyed reading our article we offer high-quality financial advice for equity release schemes out of Colchester, Essex. You can get in contact with us today by calling tel: 01206 852093 or e-mail.