Some retired people might find themselves house rich, but cash poor. Equity release can be a way of redressing the balance. The language used by equity release firms in the numerous television and newspaper adverts is enticing; “Access the value of your home, tax-free.” How much tax-free cash could you release from your home? Try our free calculator.”
The choice open to homeowners is quite bewildering and this is a growing market. In 2007, there were just 24 equity release products available to homeowners. There are now 140.
How it works:
Equity release allows homeowners to release cash from their home without having to move or make monthly repayments.
- Compound interest rolls up and is added to the original amount borrowed, meaning the size of the debt increases over time.
- The debt is repaid by selling the home of the borrower on their death, or if they move into long term care.
- Borrowers have the option of paying interest on the loan if they wish. Doing so would prevent the loan from increasing over the years.
- Most borrowers would have a “no negative equity guarantee” which means that lenders can’t access the rest of their estate if the size of the loan outstrips the value of the property.
The Good: Edna’s house, worth £750,000, hasn’t been decorated for over 25 years. The house needs the full works, a new roof, windows, kitchen, bathroom and general redecorating throughout. Living on a modest pension and with very little in savings, Edna, would love nothing more than to restore her house to its former glory, but the quotes she’s received are around £80,000. She also wants to take a dream holiday. Where is she going to find the money?
Edna decides to release equity from her home. Being a widow, she opts to take advice and consults an independent financial adviser. He tells her that at age 78, she could release up to £200,000 and finds her a competitive interest rate of 2.75%pa. She decides to release £100,000. Of that, £80,000 will be used on the works for her home. She will use the remaining £20,000 to take the six-week holiday of a lifetime. This will also allow her to be away from the house whilst it’s being renovated.
She will make no repayments and the loan will increase over time. Her two grown up children have been informed and know how the equity release plan works. They are aware that their inheritance could be reduced by the compound interest on the loan but are also aware that this could be offset by the increase in house value as a result of the renovations. House price inflation could count too. Everyone understands and is happy with Edna’s plan.
The Bad: George is also 78 and has a house down the road, similar to Edna’s. His is a widower and his children are grown up and reasonably self-sufficient but are relying on their father’s house as their future inheritance. George sees an advert in the newspaper about getting tax free cash from his home without repayments. He decides to go for it. He raises £100,000, simply because he likes the thought of having a large sum of money in his bank account. The interest rate is high at 5% and he decides to make no repayments.
The Ugly: George doesn’t fully understand the implications of what he’s done. He isn’t particularly good at maths, and the concept of compound interest is lost on him. George is private when it comes to financial matters, so it doesn’t occur to him to inform his children. The interest accrues rapidly over the years and eats into the value of his children’s inheritance. His children could be in for an unpleasant surprise when George dies.