Accounting & Finance
When Equity Release Makes Sense
Home equity release loans are the answer for asset-rich but cash-flow poor homeowners.
When we buy a property, we do so borrowing the majority of its value. The home loan is up to eighty percent of the sale price with the rest contributed by the homeowner as a ‘deposit’.
Over the many years of homeownership, the mortgage is reduced and ideally by the time of retirement; there is no money left owing on the property. However, the catch or dilemma for many homeowners is they end up mortgage-free around the time they retire and it is at this time that they lose their employment.
Now as a retiree, there’s not always the same cash flow to pay the rates, and other expenses incurred from homeownership.
Asset Rich, Cash Poor
You may have heard of the term ‘asset rich, cash poor‘ and it’s associated with the over 65s homeowners. With a mortgage-free home, that has appreciated over the years, the retiree may asset-rich but if they are living on a pensioners income and struggling to pay living expenses they are cash-flow poor.
The loan that has come to the rescue for this group of homeowners is the equity release, however, there are conditions attached like needing a good credit rating, and commitment to maintaining the home so it keeps its value.
It might sound appealing if you’re older and strapped for cash, but it is a big financial decision that will have severe implications for your estate.
Pros Of Equity Release
There are of course some catches, people often ask is equity release a good idea, with most feedback from experts saying it depends on the homeowner’s personal circumstances.
However, there are some obvious positives for the loan over and above the fact there is more cash available in retirement and the mortgagee can remain in their home of choice.
No Monthly Payments
With an equity release plan, there are no monthly payments. Interest on the loan will accumulate and remember the principle and interest are paid when the property is sold. What if the interest accrued over time is far beyond what your estate can pay once you pass away?
The plan can come with a ‘no negative equity guarantee’ so no surplus money will be taken from the homeowner’s estate should the value of your home not be enough to pay off the value of the equity release loan.
Lump-Sum or Regular Payments
Payment structures are also flexible with equity release. Lenders can choose between a lump sum payment or for regular payouts once every few weeks or so. Those with weaker pensions often benefit from this fact and use their weekly payouts to live the lifestyle they want.
Early Beneficiary Payment
The tax-free nature of equity release is often used to release money that can be passed on as an inheritance to beneficiaries long before the homeowner dies. In countries that have an inheritance tax, this strategy is popular.
Cons Of Equity Release
Once you’ve taken out equity release, you can’t use the home to finance any other loans and thus use the property as collateral or security.
Interest grows rather rapidly with equity release, meaning there could be a lot of debt come payment time, therefore, equity release is for the short term and thus suit older people who will have less time for the interest to stack up should they decide they want to exit the plan.
May Lose Government Benefits
Taking the money out of your home might also impact your ability to receive benefits. Typically older people are covered by a myriad of government programs, but they are very often geared towards income.
The windfall from your equity release might make you too “wealthy” to qualify for these programs.
Loss of Inheritance
Depending on the duration of the loan and what is owing it is possible that there will not be any money left after the property is sold and the loan fully paid.
Buyer beware. Always seek professional advice from your accountant, lawyer and financial advisor before taking any action with loans like the equity release.