Equity release is being widely promoted as a way to unlock money tied up in your property. But what are the pros and cons? Geoff Williams from Wiseman Lee explains why it is important to seek legal advice
In recent months, you’ve hardly been able to turn on the TV or the radio without an advert for equity release popping up, offering the release of money from your home as a lump sum or as monthly income.
Before you take the plunge, it’s important to be aware that there are alternative ways to raise capital by selling and downsizing your property or attracting additional income by renting out a room. Make sure you consider all other options first to ensure that equity release is right for you.
If you still feel equity release might be the way forward and you are over 55, it is important to understand what is involved.
There are two main types of equity release. The first is a lifetime mortgage. Here, money is borrowed against the value of your home. In the future, when the property becomes vacant, after you pass away or move into residential care, the mortgage is repaid from the sale of your home. Interest on a lifetime mortgage is ‘rolled-up’ and added to the loan, which will then reduce the amount your beneficiaries will inherit.
The second type of equity release scheme is a home reversion plan. Here, money is released by selling all or part of your home while you continue to live in it. Your property is then ‘leased’ back to you. The terms of the lease may either be rent-free or on a small, nominal-fee basis. As before, when you die or move into residential care, part or all of your home will belong to the equity release company, according to the terms of the contract.
There are pros and cons to both types of equity release schemes, so it is important to seek both independent financial and legal advice to help you decide whether equity release is right for you in the first place and, if so, which option suits your circumstances.
Given that your home is arguably the most valuable single asset you own, it is important to understand that signing up to an equity release scheme is a legally binding contract. A specialist solicitor will check the contract is correct and doesn’t contain any nasty surprises. They will also be able to explain any jargon, so you fully understand what you are signing up to.
Usually, the legal process for dealing with an equity release legal contract takes between six and eight weeks and there will be fees payable to your financial adviser, surveyor and solicitor.
Most equity release companies will be aware you need to take both financial and legal advice before signing on the dotted line and, in fact, all reputable companies will insist upon you doing so. If you should feel you are being rushed into a decision, this in itself should set alarm bells ringing. As the old saying goes, ‘act in haste, repent at leisure.’