Tips for applicants of equity release

Equity release is a range of financial products aimed to people over the age of 55 and consisting in taking some of the value of their home in equity (cash). With house prices rising, this kind of product is becoming more and more attractive for many homeowners.

The typical user of an equity release is a retired person with no family to inherit their property who wishes to use some of the value of their home while they still can. For many of them this is the only way to afford living in the same home.

However, not all that glitters is gold and borrowing rates are much higher than for other mortgages. A common interest rate is around 5.5pc, which rolls up. At this rate any sum you owe would double every 12 or 13 years. Age is also a factor that banks take into account.

Nonetheless, there is an option to reduce the cost of the interest, unless you need all the money in one go. This is drawdown, which is the most popular type of equity release. This way you can borrow the money in stages, as you need it.

Experts recommend applying for an amount of money slightly higher than what you thought because you don’t have to use all of it and applying for a second loan can be more difficult and expensive.

Some schemes have a minimum drawdown limit, if not it is good advice to set a quite small limit due to the fact that with smaller amounts, borrowers can enjoy more flexibility.

And what happens if you plan on moving to another place later? In this case, the best option is waiting and cashing the whole value of your home.

Another to check before signing up to any scheme is that it has a “no negative equity” guarantee, which means that even if your debt exceeds the value of your property, the bank won’t be able to access the rest of your estate.

For married couples, the loan is often set up so as not to become repayable until the death of the last person, or on his or her move into long-term care.

Finally, as equity release might have an impact on decisions about future investments or savings, for example for elderly care, it is important to evaluate every option and the possible risks with a qualified specialist. Also, depending on the circumstances of every person, there could be other catches. For example, if you’re getting means-tested state benefits, such as pension credit, coming into a large quantity of money might affect your entitlement to these.

For more information, check this article.