Experience has shown that equity release should always be considered a lifetime mortgage of last resort.
With the popularity of equity release schemes reaching an all time high, now is a good time to take stock of just why the equity release market has reached the level of consumer confidence it now commands.
There have been many highs & lows for an industry which has been much maligned. However, with increasingly flexible schemes & the lowest interest rates ever seen, we could be in for a ‘golden age’ for equity release.
It is therefore essential to seek the services of a qualified professional equity release adviser who is able to club together all their resources and ‘know how’ to complete a full fact find assessment of the clients situation.
This will include the ‘hard facts’ such as income, savings & assets etc which determine one’s current financial predicament. However, just as important are the ‘softer facts’ which mould a customer’s future viewpoint such as interest rates, property values and their potential inheritance.
Armed with this information, you should find an equity release adviser would assess whether a clients objectives could be met by alternative solutions, prior to an equity release recommendation being made.
Equity release alternatives
When releasing equity from your home it involves a number of risks. Therefore, it is important that before your equity release adviser makes any recommendations, full consideration are given to whether there are any other options that could be explored.
Equity Release Supermarket will always discuss the following alternatives as a pre cursor to any equity release recommendation. Typically, these are:
- Apply for benefits – if your retirement income is below minimum government standards, then you may qualify for means tested benefits. These would include pension credit, savings credit and council tax benefit. For tax year 2013/14 the minimum income level to qualify for is £145.40pw for a single person and £222.05 for a couple. Therefore, if retirement incomes fall below these figures then you should be making enquiries at the DWP and your local authority. Remember that taking equity release from your property can affect means tested benefits, so always get professional advice.
- Obtain a grant for home improvements – again, if your income is below government guidelines then there are certain grants that are available upon enquiry. The standard grants can include loft insulation, cavity wall insulation, new boiler and by contacting your local Home Improvement Agency (HIA) they could provide assistance to help repair or even adapt your home. Therefore, these should always be explored before taking a home equity plan.
- Downsizing – i.e. moving to a smaller, less expensive property – probably the most common & cost effective solution, rather than taking equity from your property. Sometimes an emotive issue, as most retirees have lived in their current abode for many years, often with many memories attached. However, with the children moving on, your property may become too large to maintain. Therefore, by downsizing to a smaller property you can release equity that can then be used for the purposes you require & support you financially into your retirement.
- Using other assets to provide the funding required – taking equity release involves the expense of compound interest & an interest rate charged that would be higher than that received in most investments & savings accounts. Therefore, why take equity release, when you may have considerable savings you could use instead? Nevertheless, bear in mind some investments may be used for income purposes, so need to be left in situ & there should always be an emergency fund on hand should anything untoward occur & funds required immediately. Some people even feel the necessity for a large amount on deposit as they feel more secure knowing these funds are available. As an equity release adviser, we would explain the pros and cons of this course of action and maintain equilibrium for both parties.
- Ask for assistance from other family members – Equity Release Supermarket has experience of situations where brothers, sisters or even children have assisted their parents, rather than letting them take a release of equity form their property. This could be achieved by a family member taking a personal loan, remortgaging or even taking funds from their own personal savings. Lending to parents can have its drawbacks too, & we have seen occasions where this has created more family issues than it was meant to solve. However, with formal agreements in place if necessary, this can still be a good equity release alternative.
- Reduce your expenditure – with an increase in equity release lending being for debt consolidation purposes, many people have found the income transition from employment to retirement is a struggle. To maintain living standards in retirement, compared to employment is difficult for many & some never come to terms with this loss of income. By not cutting the cloth accordingly, debts amass on credit cards & loans & the downward spiral begins. By planning ahead before retirement & then analysing where cutbacks could occur once retirement starts, can have a significant influence on future retirement finances.
- Take in a lodger – one suggestion that always raises a smile, but in theory for many could help bring in extra income. The government ‘rent a room’ scheme allows home owners to let out a furnished room and receive upto £4,250pa in gross receipts without liability to income tax. For many however, sharing their main residence with other people may not sit too comfortably, however for individuals with room to spare it could create a good tax free income. Remember to check with your home insurance company & any lease that may exist on the property to ensure it does not create any exemptions.
- Consider other types of loans – credit card, personal loan, mortgage, HP – depending on affordability & the duration of the lump sum required, there are shorter term loan options available than equity release. A personal loan or strict use of a credit card and using some of the 0% credit offers available could prove to be extremely costs effective. The lifetime nature of equity release schemes means that if they are paid off early, there could be considerable early repayment charges levied by the provider. Beware of high APR’s on loans and credit cards & bear in mind potential rate changes that could occur in the future should interest rates rise again.
As you can see before taking equity release club together all the ideas above and assess whether any of the aforementioned financial solutions could help yourself and/or beneficiaries over time. Equity Release Supermarket always suggest speaking to your children in any case to allay issues over inheritance.
To discuss how your equity release club of measures could help, contact the Equity Release Supermarket team of advisers on 0800 678 5159 or email [email protected]
Tags: compund interest, downsizing, DWP, early repayment charges, equity release, Equity Release Adviser, equity release club, Equity release interest rates, grants, home equity plan, home improvement agency, lifetime mortgage, means tested benefits, rent a room