Equity release in the UK is a popular way to access a substantial lump sum of money from your home. This could help boost retirement finances or provide support to a close relative with financial needs.
Before deciding to take equity release out, it’s essential that you carefully weigh all the benefits and potential drawbacks. Get impartial financial advice and engage a lawyer to review the contract for any irregularities.
1. Interest
Interest rate refers to the annual amount paid or received as a percentage of a loan (or deposit). It’s the cost you pay for borrowing money or receiving it when investing your savings.
Interest rates play a vital role in almost all borrowing and lending transactions, acting to either encourage investment or slow down the process.
When considering an equity release plan, your interest rate is determined by several factors. These include your age, loan-to-value3 ratio, and how much of your property must be borrowed.
2. Inheritance
Inheritance is the legal process of passing on property from one generation to the next, either through a will or through intestate laws if the deceased did not leave behind one.
Tom inherits his father Mike’s car as an example of this concept.
Tom can use the car without needing to save any of his own funds.
In the UK, inheritance tax (IHT) applies when someone passes away and their estate exceeds a certain value (£325,000 rising to £475,000 if you leave your home to direct descendants). Money received from equity release could also be subject to IHT if given away within seven years of death.
3. Repayments
No matter whether or not you choose to take out an equity release loan, there will be several monthly repayments required. While these may differ depending on the lender, most require some form of interest payment each month. As with many things finance related, doing some research ahead of time can ensure you make an informed decision when it comes to your home ownership plans.
One popular way to leverage your equity is through an equity release loan, a mortgage-based product. These products provide the benefits of both worlds – you keep the equity in your property while earning income. Before taking out such a large decision, be sure to do research and seek professional advice from someone with expertise.
4. Redemption penalties
Equity release mortgages allow you to borrow money from the value of your home minus any loans or mortgages secured against it, known as equity.
However, if you pay back your equity release loan early, an early repayment charge (ERC) may apply. This fee can be substantial and it is essential that you are aware of its implications before agreeing to a plan for equity release.
Calculating early repayment charges (ERCs) depends on the rise and fall of government bonds, commonly referred to as gilts. In the UK, this means if the gilt index drops by 0.125% or more, you will be charged an ERC; however, if it remains above this mark you could end your deal without having to pay any ERC.
5. Fees
Equity release fees are the costs associated with unlocking tax-exempt cash from your home. While the exact fees you pay may differ depending on which lender you select, they typically include a financial adviser fee and application/survey fee (including legal expenses).
When considering equity release, it’s essential to seek independent advice in order to be certain it is the best choice for you. Only an experienced advisor can give unbiased guidance and identify the plan most suited to your individual circumstances.
Equity release can be an advantageous way to access tax-exempt cash from your property. It could be beneficial for home improvements, care expenses and more.