Is equity release really as bad as it sounds?

By: Steve K Matthews
Submitted: 2008-08-21 14:02:03
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Equity release schemes have long been treated with caution, or even considered as a 'last resort'. They have a slightly tarnished reputation for being expensive, leaving homeowners with little or even negative equity, or depriving their children of their inheritance.

But is this really true, or do equity release schemes offer older homeowners at least some advantages? It most certainly depends on your personal circumstances why you want to unlock money from your property, how much and what you do with it.

Some people might not be left with a choice. In times of high inflation, when pensions do not seem to go very far and people struggle with their living costs, releasing equity from their homes may be the only viable option, because taking out another loan will hardly help.

A luckier few, who have been working hard all their lives, might make the decision to treat themselves and spend the money on a holiday of a lifetime, opt for using the freed equity for a new car, a home refurbishment or for giving it to their kids.

An equity release plan will do exactly what it says it does – free up money tied up in your property - and yes, you will be left with less equity in your home, but that is the nature of the product!

However, the rumour that it will leave you with negative equity is just that – a rumour. The equity release market was regulated by the FSA in 2004 and has adopted a code of conduct to make equity release plans safer. All reputable companies now offer a 'no negative equity guarantee'.

One available equity release option is a lifetime mortgage, whereby you borrow a set amount of money against the value of your home in form of a mortgage. You can figure a lifetime mortgage as a kind of loan which will be paid off once your property is sold.

You will still be able to own and live in your property, and won't have to pay interest. Instead compound interest is added to the value of the loan - this is where the drawback comes in: if you continue to live there for years your debt might escalate.

Another option is a home reversion plan, whereby you sell parts or all of your property to a reversion company. While you know the amount you release from the outset and it won't increase over time, the disadvantage is that you have to transfer ownership and basically become a tenant in your own home.

You have to be realistic – if you decide to release equity from your home, something has to give.

Whatever your reason is to free up some cash, think through all the options you have and do not only take into account your current situation, but also what might lie ahead – in about 10 to 15 years.

Article source: Expert Articles