Taking out equity release is a much simpler way of borrowing money than by using a traditional, ‘residential’ mortgage. (These are also available for older borrowers in the form of Retirement Interest Only (RIO) mortgages.
That’s because equity release lenders only consider the age of the youngest homeowner, where you live and the value of your property when deciding how much they will lend you. They don’t take into account your income or outgoings, or aren’t overly concerned by your credit history, so the process is much simpler and quicker.
The main downside of equity release is that it is likely to reduce the value of your estate that you leave to your loved ones. This is because you have the option of not making any monthly repayments. If you take this option, then the interest accruing on your plan will ‘compound’ over time. For example, you borrow £100,000 at an interest rate of 4%. After year one, you owe £104,000. At the end of year two you owe 4% of £104,000 – £108,160 etc. After 18 years, the amount to be repaid will have doubled to £202,581.
One of the most popular reasons people choose an equity release plan is because they are so flexible. For example, if you take out a lifetime mortgage, what you use your money for is entirely your decision.
It’s also possible to release your money as and when you need it via a drawdown equity release scheme, rather than in one lump sum.
As many people choose not to make any interest repayments over the life of their plan, this means that the interest is ‘rolled up’ or compounded and included in the final repayment when the plan ends – as we explained earlier. The longer the plan runs for, the greater the amount of interest that will have to be repaid.
In the past, lifetime mortgages could come with hefty early repayment charges (ERCs) for those wanting to fully repay their plan – as they were designed to run for the lifetime of the homeowner.
Positively, that has now changed, and all lifetime mortgages now come with fixed term early repayment charges that work in exactly the same way as they do with fixed rate, residential mortgages.
Because equity release reduces the value of your estate, it will mean a reduced inheritance for loved ones. That said, it is possible to safeguard a proportion of your property with a guaranteed inheritance plan. If this is important to you, make sure you talk this and any inheritance tax implications with your Equity Release Supermarket adviser.