Equity Release Schemes – Issues to Consider: Releasing Equity is a Long Term Commitment with Major Implications

Home-owners aged 55 or over can find a new source of income by unlocking the capital that is tied up in their property. This is called equity release and usually takes two forms – a lifetime mortgage or a home reversion plan.

An equity release scheme will release funds that can be used now. It has the potential to affect the lives of the borrowers, and their wider family, in several different ways. It is important that the possible impact is recognized and understood before any arrangement is entered into.

Issues Affecting Wealth

Schemes which release equity are long-term commitments. This means there are often penalties built in to deter early settlement. If a home-owner’s situation changes a few years into their lifetime mortgage and they decide to repay the loan, they might also have to pay substantial early settlement charges.

Because these arrangements are a way to release home equity, they will reduce the amount of any inheritance to subsequent generations. The loan is usually repaid from the proceeds of selling the property, and many lenders guarantee that the repayment will not exceed these proceeds. However, that does mean that the next generation might not receive any financial benefit from the property.

What the borrowers of lifetime mortgages also need to understand is that interest on their debt can quickly grow. Schemes to release equity are effectively a loan on which interest is charged, but no repayments are made of either capital or interest. This means the interest is added to the loan, and interest is charged on the interest. The result is a loan that can grow surprisingly quickly and in ten years a debt of fifty thousand can become a debt of eighty thousand or more.

If a home-owner is receiving any means-tested benefits they need to think about how these might be affected if their income were to increase through a lifetime mortgage. It is possible that some benefits might be reduced or even withdrawn completely. This would reduce the value of the equity release scheme to them.

Issues Affecting Lifestyle

All equity release schemes are different so it is important that those entering into them understand all the lifestyle implications. For example, they might want to move house after a few years, perhaps to be nearer to other family members or simply to down-size. They need to know whether their scheme allows this, and costs they might incur.

Lifetime mortgages are only usually available to senior citizens. This is a group of people who may well need an increasing level of care as they age. They might suffer a long-term illness or need to be moved to a nursing home. Again, it is important to establish how these changes in lifestyle will affect the mortgage and what the implications could be.

Releasing equity in a home to generate cash does not remove the home-owner from the responsibility of maintaining the property. It is possible that the loan arrangements stipulate a certain level of home maintenance in order to maintain the value of the property.

There are plenty of reasons why lifetime mortgages are a good solution to the problem of finding an income for older people. However, there are also lots of reasons why home-owners should not rush into such arrangements. They need to consider all the alternatives as well as the implications, ideally involving other family members. It is also recommended that they take professional advice.