Equity release provides a way for people over the age of 55 to access the equity in their property. However, equity release schemers, such as lifetime mortgages and home reversion plans, are complex financial products and won’t be suitable for everyone.
Learning about the pros and cons of equity release is crucial, but exploring the alternatives to equity release is just as important too.
Here are six options to consider before making equity release your final choice:
- Retirement interest-only mortgage
- Secured loan
- Unsecured loan
- Home improvement loan
If you haven’t paid off your mortgage you could consider remortgaging to release equity. This option will allow you to release a sum that you can use for any purpose you wish. Ordinary mortgages also tend to work out less expensive than equity release overall.
By remortgaging to a new deal you can unlock some of the equity that has built up in your home. For example, you may have a home worth £300,000 and an outstanding mortgage of £50,000. If you request £100,000 when remortgaging you’ll have the required £50,000 to repay your current mortgage and a further £50,000 to spend as you choose.
But while mortgages for older borrowers are available, getting one is not always straightforward. Borrowing can become more difficult the older you are, and many lenders have strict rules about the maximum age you can be at the end of the mortgage term. You’ll also need to have sufficient income to support your mortgage repayments.
A retirement interest-only (RIO) mortgage
A retirement interest-only mortgage, or RIO mortgage as it is often known, allows older homeowners – typically over the age of 55 – to unlock the equity in their property without the interest that must be paid rolling up, as it can with equity release.
With a RIO mortgage, you repay the interest each month but don’t need to pay back the capital until you sell the house, die or move into long-term care. Lenders will take account of your income to make sure you’re able to meet the monthly repayments but, because it is only the interest that you need to cover, this type of mortgage could prove a viable option even if you only have pension income to rely on.
The main advantage compared with a lifetime mortgage is that there will be a smaller amount to repay at the end because you’ll have been making interest payments every month, rather than the interest being rolled up and paid at the end of the mortgage.
» MORE: How RIO mortgages work
A secured loan
Secured loans are secured against an asset, such as a house. In other words, the lender has the security of knowing that if you’re unable to repay the loan, they’ll be able to take control of your property, sell it and use the proceeds to get their money back. As a result, secured loans normally have a lower interest rate, or borrowing cost, than unsecured loans. But they’re risky for the borrower because you could lose your home if you run into financial difficulty.
The main advantage of a secured loan compared to an equity release product is that it’s a relatively simple product that you can fully repay over a shorter term of perhaps five or 10 years. However, you can expect secured loans to have age and affordability restrictions similar to regular mortgage providers.
An unsecured loan
Unsecured loans are even simpler than secured loans. You borrow money and agree to make regular payments until the loan is repaid in full. But, because the loan isn’t secured on your home or another asset, you may face a higher borrowing cost than with a secured loan. Your home is not at risk but the lender can go to court to try to get their money back.
You could also raise funds via peer-to-peer lending, whereby individuals obtain loans directly from other individuals. You may be able to borrow money more cheaply than from a financial institution, but there’s additional risks to be aware of.
Another option worth exploring that offers the potential to keep borrowing costs down are credit unions – self-help cooperatives whose members pool their savings to provide each other with credit at relatively low interest rates.
All of these options will still require you to have a dependable income and affordability to support the repayments.
A home improvement loan
If you are considering equity release to fund the cost of house renovations, you may want to explore a home improvement loan instead.
There are also a number of government grants and schemes that may be able to help fund certain home improvements. These tend to be available through local authorities and are generally only available to homeowners or private tenants on low incomes. Grants may be available to upgrade the heating, insulation and energy efficiency of homes. Contact your local authority to find out if help is available in your area.
Downsize to a cheaper property
Another way to access the equity in your property is to sell your current home and move to a cheaper property.
This can free up tax-free cash that you can use to pay for anything you wish. The major advantage is that you keep your capital intact and don’t incur the debt or costs associated with equity release schemes.
However, there are potential downsides of downsizing, including:
- It could take time to sell your home, so you may wait longer to access your cash than if you opted for equity release.
- You could struggle to release the amount of equity you need or find a cheaper home that still meets all your needs.
- You may have to pay stamp duty on your new home and you’ll incur other costs, such as estate agent fees, a valuation fee and legal costs.
- You may be reluctant to leave a much-loved house.
Deciding if equity release is the right option
Choosing between equity release or any one of the alternatives to equity release is a hugely important decision. You must take the time to learn how equity release works, and how the other options that are available could help you too.
Your safety net is the requirement that you must always seek professional advice from a suitably qualified equity release adviser before you’re allowed to take out an equity release product. As well as being experts on equity release, it is their job to point out the potential alternatives that may be better suited to you too.
Whatever your choice, finding the appropriate mortgage, loan or equity release scheme is then key, but something you should expect your adviser to help with as well.
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