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Equity release vs the alternatives

Article | Apr 2024

Equity release is one of the financial options available to homeowners over the age of 55 who want to get a lump sum of money. By releasing equity from a property, the value of it can be unlocked in the form of a tax-free cash lump sum. This cash can then be spent to buy a second home, gift early inheritance, or fund a dream retirement.

But how does it compare to the alternative options?

Firstly, you should understand what equity release is and how it works. There are different types of equity release product, but the most popular is a Lifetime Mortgage. Responsible Life’s advisers are experts in providing industry leading advice on Lifetime Mortgages, as well as a variety of other mortgage options.

In this article, we will explore the benefits of releasing equity in your home, as well as looking at how it compares against the alternative options.

Equity release vs remortgaging?

One of the benefits of equity release is that the cash you receive after a successful application is tax-free. There is also a guarantee that you will never owe more than the full valuation of your property at the time it is sold.

Interest rates on equity release are also fixed for life, although the interest rate compounds so the amount you owe will increase over time. However, you are guaranteed the right to make voluntary payments, usually penalty-free up to 10% of the initial amount borrowed.

With the interest rates being fixed, your adviser can produce an illustration that will show exactly how much you might owe in the future, both with and without payments. Additionally, with them being optional, you can choose to stop making them at any time. Furthermore, if you opt to meet with one of our equity release advisers, you can get access to an expert comparison service and lifetime care to ensure that your equity release product continues to work for you. Additionally, you will only pay a fee for this service, currently not exceeding £1,690, if you choose to proceed and actually take out a mortgage with our help.

So, when we compare equity release vs. remortgaging, one of the big considerations is the difference in payments. With a standard remortgage, whether that be capital repayment or interest only, you will be committing to monthly payments. That means your home could be at risk of repossession should you miss any of those.

For some homeowners, a remortgage option could be more suitable though. There are options ranging from capital repayment and interest-only, to a mixture of the two, so homeowners can be empowered to achieve their goals.

Equity release will reduce the value of your estate and may affect your entitlement to means-tested benefits. This is something to consider before going ahead with an application.

Equity release vs downsizing

Another one of the alternatives to equity release is downsizing. This option can be useful if you don’t think borrowing against the value of your property is right for you and if you have future intentions to move to a new home. By moving to a smaller property with a lower value, you can release some equity that way.

As with any major decision, it’s best to approach the idea of downsizing being fully informed about the process and any costs that may be involved. These are likely to include estate agent fees, stamp duty or land tax, surveys, removal charges and legal fees.

A smaller home may mean lower maintenance and monthly costs, meaning more available in your budget. This can also be a way to free up some cash in retirement.

However, there are emotional costs to consider with downsizing and moving out of the home you have lived in for years. Could you enjoy the same quality of life you currently do? Would moving take you away from friends and family where you currently live?

Equity release would enable you to get the money you require, without having to lose the home you have built up so many memories in.

Equity release vs Retirement Interest-Only Mortgages

Finally, another alternative to equity release is a Retirement Interest-Only Mortgage. This option allows homeowners over the age of 55 to borrow a tax-free sum from their home and only pay on the interest each month.

Much like equity release, the full amount borrowed is not repaid until the homeowner passes away or enters long-term care. It differs in that the payments are compulsory.

There are some drawbacks to a Retirement Interest-Only Mortgage. As you are committing to making payments for the rest of your life, there are affordability checks that you will need to pass. As it needs to remain suitable for a time when you may no longer be working, it is based on your future income, including pensions and any other guaranteed funds you may have.

For many, this makes this option a difficult product to be eligible for. With a Lifetime Mortgage, you could treat it in a similar way by committing to pay the interest yet enjoy the flexibility that comes with knowing that you don’t need to prove long-term affordability and can stop making payments whenever you choose.

Need more information on equity release or the alternatives?

If you want to learn more about equity release and the potential alternatives, book a consultation with one of our advisers today. They are on hand to offer a comprehensive comparison service, assessing whether borrowing from your home is the right choice for you.

To book in your advice appointment, get in touch with our Information Team today. You can do so by filling out the equity release calculator or scheduling a call for a time and date that suits you.

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