For many people, their home is their most valuable asset. Equity release through remortgaging allows you to unlock a portion of the value of your property in the form of a cash. There are two main types of equity release: home reversion plans and lifetime mortgages.
Usually aimed at older homeowners who are no longer in full-time employment, the balance owed is typically paid-off against your house value when you die, or move into long term care. This might allow you to tick off the more expensive items on your bucket list, but it’s also worth considering the various drawbacks of equity release, and how to avoid them.
We outline the potential pitfalls of borrowing against the equity in your home below:
One of the most obvious potential pitfalls of equity release is that is could eat into the value of a property that you wish to leave behind when you pass away. Every penny that you take out against your house could translate into money that you won’t pass down to your children, friends and family.
Risk losing benefits
If you are receiving means-tested state benefits, the cash you gain through equity release could change your entitlement, meaning that you could be worse off than you think after you’ve cashed in the value of your domicile.
Risk losing your home
While certain providers, such as Aviva, are regulated by Safe Home Income Plans(SHIP) and you won’t be kicked out of your home if you don’t meet the repayments, or end up in negative equity, there are some that can’t make that promise. It’s not worth risking the roof over your head, so it makes sense to pick a provider that offers security. Many equity release schemes don’t require repayments, but you could still find yourself in hot water if your loan doesn’t protect you against negative equity.
Another danger of taking advantage of equity release is that if house prices drop then you could end up owing more than your property is worth- a situation known as being in negative equity. In the nineties interest rates skyrocketed and house prices dropped for many, leaving thousands of pensioners borrowing against their homes in negative equity. Independent financial advice is a must to protect yourself from this daunting prospect, as house price slumps in future could put you in a tough spot without it. There are now some protective measures in place, and Equity Release Council members offer a ‘no negative equity guarantee’ so that you cannot secure more than the value of your home.
Alternatives to equity release
There are many alternatives that may be worth considering before you start digging into the value of your home. Savings, assets, even renting a room in your home if you have one to spare, can all be ways of generating extra cash. Downsizing can provide a long term option, especially if you have several spare bedrooms leftover from your from children flying the nest. Although there are many potential pitfalls, equity release can still be a useful solution for some, whether you want to take a cruise to the Galápagos Islands, give your home a lick of paint, pay off some outstanding debts or explore investment opportunities. No matter what you want the extra money for, it’s worth considering the potential negative side of equity release before you make the commitment.
Equity release is considered a complex area of financial advice, and advisers often have to sit an additional specialist exam to be allowed to advise on this topic. You can read more about equity release in our guide to equity release here.