An equity release scheme may seem like a good idea, but it has some significant drawbacks. If this is being considered as an option to help pay for living expenses, it's important to have a complete understanding of how this decision might affect you and others in the future. Once you know the truth, you may want to think about alternatives that might fit your needs better.
What Is an Equity Release?
An equity release is a way to realise the value you have in a property - often your home - and turn it into cash. You need to be over the age of 55 and you can still have a mortgage, so you don't need to own the property outright. Depending on the arrangement, the release can either be taken in small amounts over time or the funds taken as a lump sum.
How Does an Equity Release Work?
In a traditional mortgage, monthly payments are made to the lender until the loan is paid off. Interest is added to each payment, but the interest gradually decreases as you continue to pay off the loan. In an equity release, a company pays you for the value of your home (minus any loans etc) and you are able to continue living in it. Repayment on the loan is only necessary when the owner passes away, goes into an assisted living facility or moves into something similar.
This may seem like a great deal, but the interest you must pay on this type of arrangement can be extremely high. Instead of the interest gradually declining in a standard mortgage, the interest continues to compound.
Robert Bull, the CEO of RoyaleLife, the UK's largest provider of bungalow living for the over 45s, explains: "It's true that you get to stay in your home, and you don't make repayments on the money until you're 'released' ... either until you die or go into care - but the interest you're charged on the loan does mount up. For example, say your house is worth £450,000 and you release £100,000 - after five years, with a compound interest rate of 6.5%, you'll owe over £137,000. After 20 years, that figure will rise to £350,000, which is nearly as much as your house was worth in the first place."
Interest rates vary on equity releases, but they are often between 3% and 7%. Rates are lower today than they have been for some time, but that does not necessarily mean an equity release is a good financial choice for you or your family.
The Dangers of an Equity Release
An equity release also does more than just cost interest money over a long time. Your decision to get money immediately directly impacts your loved ones and the amount of inheritance they receive. In most circumstances, your loved ones will have to pay the equity release back after you pass and that is in addition to any traditional mortgage you might have.
Robert Bull states, "The brutal reality will be that you could well end up leaving next to nothing as an inheritance for the kids, or for your well-deserved retirement plans." Finding horror stories of children having to pay back thousands of pounds of borrowed funds is not difficult - that is certainly not the legacy you were hoping to leave your children.
As Robert Bull points out, taking the "long view" can be much more beneficial for you and your family, saying, "You're much more effective if you plan well - that's the focus of everything I do today."
Alternatives to an Equity Release
If you're thinking about a big expense and considering your options to get funds, whether you want to fund your retirement or you have a large, unexpected expense, an equity release should be one of your last options. Instead, you may want to consider the value of downsizing as you move toward retirement.
As the CEO of RoyaleLife, Robert Bull pioneered the "bungalow lifestyle," which involves much lower maintenance and often a relatively low-cost way to live the second half of your life in style. The company currently has 64 luxury developments across the country, with future plans to develop a further 32.
RoyaleLife is extremely passionate about setting individuals up with a solid financial future, in addition to living in a wonderful home to call their own. They offer a Home Part Exchange scheme that allows you to essentially trade your existing home for a new luxury bungalow and get the remaining amount in cash. Crucially, RoyaleLife provides 100% of the value of your current property, subject to two independent valuations There are no estate agent fees with this scheme, no solicitors to pay and no stamp duty. The transaction allows you to own your bungalow outright, with absolutely no debt involved.
Robert Bull notes that downsizing is becoming more and more popular today and that he sees many people "freeing up" equity and using the funds to perhaps retire or pursue a more comfortable lifestyle without worrying too much about money.
He said: "Having the freedom to refocus your money on things and people you love, rather than a large house that may no longer suit you, is very appealing to many people."
