Homeowners who might need quick access to cash might have seen advertisements for equity release, which is a method for releasing some money from the market value of your house or flat without a requirement to pay the funds back during your lifetime, or having to move out.
If that sounds promising and something you’d like to consider, you might have to temper your expectations because equity release isn’t available for everyone. And even for those people who are eligible, it still might not be the best way to swiftly boost their bank accounts. There are some potential drawbacks from equity release that are important to know from the start
One viable alternative to equity release is selling your existing property, although this naturally means that you would have to search for a new home to either rent or buy. It can be a difficult decision to make, one that requires an honest look at the ins and outs of both options.
What is equity release and can everyone access it?
A great place to start as you consider equity release versus selling your home is to understand exactly what the former term actually means. Equity refers to the value of your house or flat after you deduct any remaining balance on the mortgage for the home, in other words it’s the cash lump sum that you’d make if you were to sell the property today.
However, some people don’t want to sell their homes yet still need access to that equity. And that’s where equity release comes in – it allows certain people who have paid down all of their mortgage or a significant portion of it to access some of the remaining equity. The funds will be paid out either through a regular set income each month, or through a large cash lump sum. This money can then be used for whatever purpose the homeowner intends, although it’s strongly advised to only use it for long-term retirement care and the like, and not spending on luxuries.
Understanding the two different types of equity release
There are two types of equity release: lifetime mortgage and home reversion.
Lifetime mortgages are the most common equity release, through which you would borrow a set amount of money from your equity along the terms of a regular mortgage. The balance would be paid off when your home is sold after you die, or when you relocate to a retirement home. Homeowners are typically eligible to borrow between 18 percent and 50 percent of the market value of a property, and the percentage increases with the age of the applicant.
You can either opt against paying any interest on the mortgage, known as a roll-up mortgage, but you’ll pay more once the home is sold because of the compounded interest. Or you can use an interest paying mortgage where you pay interest each month and reduce the final debt total.
And for your reassurance, many equity release lenders offer a guarantee of no negative equity, meaning that you will never owe more debt than the final property sale price.
By contrast, with home reversion you will agree to sell part or all of your flat or house, but you’ll also retain the legal authority to continue living there until you move to a longer-term retirement care facility or die. Money is provided either via an income or a lump sum.
But note that you won’t get the total market value when your home is sold through home reversion. Instead, if your property’s value increases in the future then you will only get the financial benefit of profit from the portion of the home that you still own. And some lenders mandate that you must be at least 60 years old to apply. Your health is another key factor, with someone in poorer health getting a bigger share of their home’s value once it is sold.
The pros and cons of pursuing equity release
A clear benefit of equity release is that you’ll get fast access to a large amount of money, and you can use those funds to achieve whatever goal you might have, such as funding longer-term medical care, without having the potentially long wait of finding a buyer for your home.
And it allows older people the ability to enjoy some of the financial benefit of owning their property, rather than simply leaving the entire amount to their beneficiaries, whilst potentially still retaining some ownership of the home that can be designated for them in a will.
But there can also be some downsides associated with equity release, including the fact that the more debt you owe when you die or move out of your home and into long-term care, you’ll receive a smaller amount of the final property sale profit to pass on to your beneficiaries.
And some people can be lured into equity release with the promise of a large amount of cash that they then spend on luxuries rather than paying for long-term care. Once the money is spent, it cannot be loaned again, so only pursue equity release for sensible, crucial spending.
Unfortunately, there are some equity release fraudsters who will try to defraud older people out of their money or even their entire house or flat. The HomeOwners Alliance, an independent organisation that advocates for the rights of property owners in the UK, notes one case where a home agent had to pay a fine of 1 million for convincing people to accept reduced prices for selling their properties even though he secretly knew they were worth more, and then he sold the homes at a greater value and kept the difference in sale profit.
Unscrupulous private equity lenders might also try to upsell homeowners to take on more expensive loans than they need, or they may downplay or hide certain fees until it’s too late and the property owner is now subject to a binding legal agreement to pay them.
Think about selling your home instead of equity release
Instead of pursuing equity release, you could instead decide to sell your home and then use the proceeds to either downsize to a smaller facility or to fund your long-term care at a retirement home or similar site. This has the benefit of avoiding any of the complicated lending terms and agreements, and instead focuses on a simple effort to find a buyer for your home.
If you’d prefer to sell your home, you will have to decide between using an estate agent, a property auctioneer, or a fast home buyer like LDN Properties.
Estate agents will reduce plenty of stress from the selling process because they’ll be responsible for advertising your home’s listing and hosting viewings where potential buyers come to see the property. But you might be waiting many months, or in worst case scenarios even more than a year, before you receive a serious offer from a buyer. And remember that you will have to pay the estate agent possibly large commission for their work selling your home.
Auctions can be a gamble because you never know if your home will receive zero bids, in which case it won’t sell, or only just one bid at the reserve price, which is the lowest possible value at which you are comfortable with your property selling. Auctions can be much quicker than selling via an estate agent, although you can expect the entire process to take at least a couple of months. And you will also have to pay auctioneers commission for the work that they do.
Fast home buyers are usually able to complete the purchase of most properties within a handful of weeks, and that includes all aspects of buying your home such as paying you the proceeds and exchanging contracts. You won’t have to put up with any viewings from strangers, and another benefit is that the reputable quick property buyers will never charge you any fees.
Make a decision that will help you achieve your goals
It might seem overwhelming when trying to decide between equity release and selling your home, and the right decision is going to depend on the precise reasons for why you need a large amount of cash soon. You should carefully consider the various pros and cons of both approaches carefully to help you figure out which option will be best for you.