Is There a Better Alternative to Equity Release?
If you are getting older and finding it difficult to make ends meet with the ongoing cost-of-living crisis you may be considering Equity Release. For many, Equity Release provides a valuable lifeline to free up cash in retirement and live comfortably later in life.
But is Equity Release right for you? You may be surprised to learn that Equity Release is only one of a large range of options available to you and you might want to consider alternatives before committing to Equity Release.
This guide explores Equity Release and the many alternatives available.
What is Equity Release?
Equity Release is a mortgage product tailored to those aged 55 or over. Unlike a traditional mortgage product, you will not be mandated to make monthly repayments on the mortgage. If you choose not to make payments, the interest on the mortgage rolls up and is paid by your next of kin when you pass away or by yourself when you go into long-term care.
In most cases the next of kin elects to sell the property to repay the Equity Release but they can also opt to repay it from your estate or using their own funds. There is a ‘No Negative Equity Guarantee’ with all Equity Release products that are approved by the Equity Release Council. This means that with those products you cannot owe more than the value of your property at any time. If there is negative equity when your beneficiaries inherit the property, the surplus is written off by the lender.
There are two Equity Release products in the UK, Lifetime Mortgages and Home Reversion Plans.
With a Lifetime Mortgage, a lender typically allows you to borrow up to 50% of the property value. They release the funds to you and the interest is payable when you pass away or move into long-term care.
Home Reversion Plans
Home Reversion plans work in a slightly different way as a lender will buy a percentage of your property at the outset. You will not pay rent for the time you live in the property and there is no interest owed with most plans.
However, to make their profit, Home Reversion Plan providers typically offer payment far below market value. For this reason, they make up a minority of the market with Lifetime Mortgages accounting for over 95% of all Equity Release products taken.
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Alternatives to Equity Release
There are risks involved with Equity Release (as there are with any financial product) and some people struggle with the idea of disinheriting their children by using Equity Release.
The good news is there are so many other options available to you if Equity Release does not seem suitable for your personal situation.
Retirement Interest Only Mortgage
A retirement interest only mortgage is a mortgage where you borrow capital and make monthly interest payments.
It is a good alternative to Equity Release for those who can afford monthly mortgage repayments or may have future income from pension drawdowns available. Repaying the interest allows you to protect some of the inheritance you may wish to pass on.
Most Retirement Interest Only Mortgages ask for the capital repayment upon sale of the property, death or needing long-term care. There are some products to be wary of with fixed terms, typically up to age 90.
Traditional Remortgage to Release Equity
If you have the income from pensions to make both capital and interest payments on a mortgage, your first port of call should be a traditional remortgage.
Lenders will ask for proof of income such as your current wages and future pension income (evidenced by pension statements).
Because we are generally living longer as a population in the U.K, mortgage companies are much more accommodating to older borrowers than they have been historically.
Downsizing presents a great opportunity to free up cash tied in your property without needing to borrow money.
To downsize you will sell your property and buy a smaller, cheaper alternative. Downsizing also presents practical advantages such as moving from a house to a bungalow for easier house-management and mobility in your later years.
The risk of downsizing is the fees and stamp-duty involved may drastically reduce or eliminate any financial benefit you initially anticipated to receive.
Most major banks and building societies offer unsecured loans, typically up to £25,000. These loans can help you obtain money over a short term and might be preferable compared to the long-term financial commitment of Equity Release.
Unsecured loans typically have a higher interest rate than a traditional mortgage and have comparable interest rates to Equity Release. The downside of unsecured finance is the limit on the amount you can borrow and the purpose for which you borrow the money. Most lenders require you to borrow money for a specific purpose like buying a new vehicle.
In rare cases, you might want to consider secured finance. Lenders in the secured finance sector allow you to borrow money against your property in return for monthly capital and interest payments. The lenders are typically known as second mortgage or second charge lenders who have more flexible lending criteria than traditional mortgage providers.
The reason it is rare to look at secured finance as opposed to traditional mortgage lending is that secured lenders charge higher interest rates and make the loan much more expensive.
There is the obvious option to continue working. Working beyond the state retirement age is becoming increasingly popular in society, especially if you have spent a lifetime building knowledge in a trade or niche area.
With the growth in online business and remote working, there is now great flexibility in the labour market for people to work later in life.
If maintaining a full time job is not suitable, you may opt to take on a part-time job to supplement your income instead.
If you are earning money and claiming a pension you should ensure you are fulfilling all tax obligations as supplementing pension income can cause complicated tax arrangements.
Letting Rooms in your Home
If you have a large enough property and feel comfortable with offering accommodation to a lodger, there are plenty of websites to advertise your spare room for let.
Once again, make sure you know how much tax you need to pay if letting your room out.
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At Boon Brokers, we specialise in Market Mortgage, Insurance and Equity Release brokerage. We provide fee free advice on Equity Release, Remortgages, RIOs, and many other mortgage types.
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