Equity release is an increasingly popular option that is available to over-55s, although the pros and cons are not clearly being explained with wide-ranging implications. With over-55s withdrawing £11m a day from the equity held in their homes, problems are now coming to light.
HOW IT WORKS
Under equity release, home owners can take out a mortgage to release cash from their homes. The loans are repaid when the house is sold either when they pass away or go into care.
The second option available is called a ‘home reversion’, where people can sell part or all of their property in return for a lump sum or regular payments.
Both options enable the home owner to live in their home. The money can be used to facilitate deposits for younger family members, a holiday of a lifetime, buying a new vehicle, home improvements and such like.
PROS AND CONS OF EQUITY RELEASE
Rising property values can offset the costs of these loans, although it is worth bearing in mind that the interest is compound (meaning that you are charged interest on top of interest) at an average rate of about 5%. This rate of interest is substantially higher than traditional high street mortgages, and I wonder what the commission payments are for those that are selling these packages.
Taking an equity release loan can be very expensive and can easily swallow up a huge chunk of equity in time.
Their are tax advantages to it though, especially for those who have no offspring with property nudging towards the threshold of £325,000 where Inheritance Tax at 40% applies. Taxing people on the wealth that they have accrued and have invariably already been taxed on is unfair and morally wrong, so I am personally in favour of any method that avoids this iniquitous tax.
You are here for a good time and not a long time, so I can see the appeal of it if you have no offspring and remain in good health with no other commitments.
THE NEXT SCANDAL
Whether this turns out to be the next PPI scandal remains to be seen. I am wary of this, given how much is being spend on advertisements selling it as an easy way to access the equity held in property. The media are now getting traction on this and this is expected to be a ticking time-bomb with mis-selling at the heart of it.
What are your thoughts on the pros and cons of equity release?