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Disadvantages Of Equity Release

At Equity Release Warehouse, we value the importance of honest advice, so we would never mislead you by only discussing the benefits of releasing equity from your home.

It is no secret that taking out equity comes with various challenges, so the best thing to do is consider the advantages and disadvantages of equity release and how it may affect you personally.

You can do this by talking to equity release providers, financial advisers, specialists, solicitors, and of course by reaching out to us for a consultation at any time between 8 am-8 pm Monday to Sunday.

Please call our 24-Hour Helpline: 0330 058 1579

What are the Advantages of Equity Release?

Before we delve into the downsides of equity release, we want to remind you of the benefits in case you haven’t heard much about releasing equity.

To begin with, it goes without saying that equity release is excellent for people who need an extra source of income and do not want to start working again. Though other loans may be available, they will need to be paid back in the future.

However, with an equity loan, consumers can relax in the knowledge that the money will not be owed back in their lifetime, as it is collected when the property is eventually sold.

Another advantage of equity release is the fact that there are so many different types of schemes available, so you could argue there is something for everyone.

People who want to repay early, people who haven’t yet retired, people who want to pay low interest, people who want to leave an inheritance, and the list goes on.

The eligibility criteria for equity release is not too strict, so many pensioners have the opportunity to qualify.

The only factors involved are age (you must be over 55), being a homeowner, and your property is worth at least £70,000.

You can live anywhere in the UK, you can still be working or you can be retired, and your income and credit rating does not have to be taken into account (though it will be with some plans).

Please call our 24-Hour Helpline: 0330 058 1579

What are the Disadvantages of Equity Release?

Firstly, any time you take out a loan, you are taking a risk as it needs to be paid back. Though equity loans are not due until your property is sold, you have to keep in mind the fact that the interest is accrued over time and added to the amount you owe (compound interest).

This means you may find the process stressful as you may not feel like the money is all yours to spend.

Secondly, if you are keen to leave money for your loved ones, this becomes more complicated when you release equity, as some of the proceeds of the sale of your home will have to go to the equity release provider when you pass away or move into care.

Though you can ensure some money goes to your family, the amount will be less than if you didn’t take out equity at all.

Next, we may say that there is an equity release scheme for everyone, but the truth is that many arrangements are limited, so they are not as beneficial as they initially seem to be.

For example, you may believe that an enhanced/ill-health plan will provide you with the most benefits if you are in poor health

However, the interest rates tend to be higher with this loan, so you may end up owing more than you expect.

We have stated that it isn’t difficult to qualify for equity release, and while this is true, the fact is that not everyone will be able to release equity. If someone is struggling financially and their property is worth less than £70,000, they cannot take out equity.

If they are still under 65 and they would like a home reversion, they must wait until they reach the minimum age. With certain schemes, you cannot even have a poor credit rating or a low income, demonstrating that equity release is not for everyone.

In general, once you have taken out equity, it is very hard to get out of the plan you are involved with. You may be charged with an early repayment penalty that can be as much as 20% of the amount that you already owe.

This means releasing equity requires total commitment, and not everyone is ready to make a promise that they cannot break for the rest of their lives, and that will go on to impact their beneficiaries.

In terms of reversion schemes, the lump sum of tax-free cash that you receive will be lower than the value of the property, which is a dealbreaker for some homeowners.

You will also have to give up your status as a homeowner in favour of the equity release provider owning your home.

Finally, when you pass away or go into care, your home must be vacated very quickly, which can add stress to your loved ones’ lives when they are already grieving.

Lifetime mortgages involve the stress of compound interest, so if you don’t go with an interest-only plan, you may worry about the amount of interest that is adding up over time. It can also be more difficult to implement inheritance protection, which can cause people to worry about whether their friends and family will benefit from their income when they pass away.

Please call our 24-Hour Helpline: 0330 058 1579

How to Release Equity Safely

There are ways to release equity that are safer than others, and in being as safe as possible, you can ensure the benefits outweigh the disadvantages for you. Here are some tips for releasing equity safely:

1. Ensure you can afford equity release

Before you decide to release equity from your home, we advise you to make sure you can afford to do so.

This may sound strange, as you will be receiving money rather than paying out, but you should make sure you are happy for less money to be available to your family at the end of your life. If monthly payments are required, you must make sure you can afford to do this.

2. Get a Power of Attorney

It’s sensible to get a power of attorney when you release equity as this ensures you have someone else who can make important decisions for you if you are not able to further down the line.

It also means it won’t be only you who has to complete administrative tasks, as the attorney will be licensed to do this too.

Please call our 24-Hour Helpline: 0330 058 1579

How to Protect Your Family With Equity Release

Firstly, we recommend keeping your family involved in the equity release process so that they understand the drawbacks of equity release and the particular form of equity release you have selected.

It’s always good to have the opinion of multiple people you trust so that you can consider equity release from different points of view.

Next, find a scheme that protects inheritance. Home reversion is good for this, as you can save a portion of your home for your beneficiaries.

There are also some lifetime mortgages that allow you to preserve some of your funds for family, so if this is important to you, speak to a financial adviser and an equity release specialist about how to find the appropriate plan.

Finally, when you take out equity, you are protecting your family from paying inheritance tax on the money they are left with, as equity release funds are not eligible for inheritance tax.

This means your family could benefit from receiving the full amount of money, which wouldn’t happen with a traditional mortgage.

Please call our 24-Hour Helpline: 0330 058 1579

How to Be Informed Before You Take Out Equity

Some people are not interested in speaking to an equity release adviser before taking out equity, as they believe they already know the cons of equity release, as well as equity release pros. However, when you research equity release, you are always looking at general rules.

With an adviser, you would be discussing the specific benefits releasing equity could offer you and your family, and it’s very important to discover this before making any decisions.

You need to carefully consider whether equity release is right for you by analysing your current situation and your wishes for the future.

To do this, reach out to us for a free consultation. Alternatively, you could speak to a charity for free, or find an independent adviser who may or may not charge you.

Another way to get informed is to make the most of our free equity release calculator that uses your information (your property value, property type, and age) to determine your entitlement, and then how much money you could release from your property.

This will help you to consider whether it would be worth it to release equity.

How to Choose the Type of Equity Release With the Least Amount of Disadvantages

The most popular type of equity release is not necessarily the right one for you, and a less popular one may be perfect for you.

For this reason, we cannot recommend one specific plan until we have listened to your preferences and considered your eligibility for each one.

However, what we can do is give you some tips for choosing the ideal scheme for you:

1. Decide what you are releasing equity for

You do not always have to decide this before you take out equity, but we recommend doing so to avoid spending on things you don’t need.

Another reason to do this is that certain plans require you to spend the loan on specific things. For example, if you are releasing money to purchase a second home or holiday home, you would need the second/holiday home plan.

If you want to rent out a property with the help of a loan secured against the value of your home, the buy-to-let arrangement would be the one for you.

For other things like home improvements, you would probably be best with a lump sum plan as you would receive all of the money at once.

2. Consider whether you would prefer monthly payments or a lump sum (or both)

We briefly mentioned this above, but it deserves another mention as not enough people spend time considering this. There is a huge difference between receiving the loan all at once and in instalments, and you need to decide which one would work for you.

If you are using the loan for a specific project and you need the money quickly, a lump sum would usually be preferable. However, if you need your monthly income topping up, consistent payments would be ideal.

Alternatively, you could choose a drawdown plan, which involves receiving an initial amount as a lump sum and then being able to withdraw more money when you need it.

3. Think about whether you would rather pay off the interest or the loan early

With some plans, you are able to pay back some of the interest or loan early. The main schemes for this are the voluntary repayment plan (designed to help you pay back the loan early) and the interest-only plan (for people who want to take care of the interest early).

The reason you need to consider this now is that most arrangements do not favour early repayment, so if you believe the debt will be too much of a burden for you and you will want to contribute towards it at some point, you should choose one of the above schemes to avoid any early payment penalties.

Please call our 24-Hour Helpline: 0330 058 1579

Is Equity Release a Good Idea For You?

We have covered some of the cons of releasing equity today, but as always, it’s best to get professional advice from an individual or firm that is regulated by the FCA and is a member of the Equity Release Council (ERC).

Before you do this, you could do some more research for yourself as there is always more to learn about the advantages and disadvantages of equity loans.

Our website is an excellent place to start, as it covers many different aspects of taking out equity. If you head to our help centre, our blog and our plans page, you will receive answers to questions about many different topics.

These include:

  • The amount of money you could release from your home, the amount of inheritance your beneficiaries could receive
  • What happens if you don’t pay off the interest in full
  • What happens if you are claiming means-tested state benefits
  • Whether you have to continue living in the equity property
  • What happens when you move into long-term care, advice for organising your finances, how to seek legal advice,
  • Whether you can move to a smaller property
  • How to secure a no negative equity guarantee (where you never owe more than the full market value of your home)

Please call our 24-Hour Helpline: 0330 058 1579

Discuss the Pros and Cons of Equity Release With Us

What better place to start than to contact Equity Release Warehouse and benefit from our impartial advice? First, we will consider your eligibility, so we will need to know some personal details such as your property’s value (must be over £70,000) and your age (55 years old as a minimum).

We may also ask additional questions to learn more about situation, such as whether you would be willing to sell part of your home or whether you would prefer to take out a mortgage, the details of your pension credit, and whether you would consider different schemes (as some people already know the plan they want to opt for).

These questions are what make our consultations so helpful, as they allow us to carefully consider which option is best for you, even if we end up recommending that you downsize.

However, remember that we are not making the decision for you – we are simply here to help you understand the different schemes and help you decide which one would work best for you.

If you are not yet ready to take the next step but you would still like to register your interest, please continue to browse our site for more advice and consider calling us to discuss your future plans.

Even if you are younger than 55 years old, it’s never too early to start planning for your future financial situation.

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