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 borrow the majority of its value. The home loan is up to eighty percent of the sale price, with the homeowner contributing the rest 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 that they end up mortgage-free around the time they retire, and it is at this time that they lose their employment.

As a retiree, I don’t always have the same cash flow to cover the taxes and other expenses associated with homeownership.

Asset Rich, Cash Poor

You may have heard of the term ‘ asset-rich, cash-poor’ over-65s homeowners. With a mortgage-free home that has appreciated over the years, the retiree may have assets, but if they are living on a pensioner’s income and struggling to pay living expenses they are cash-flow poor.

The equity release loan has come to the rescue for this group of homeowners. However, there are conditions attached, such as a good credit rating and a commitment to maintaining the home so that it retains its value.

It might sound appealing if you’re older and strapped for cash, but it is a big financial decision with severe implications for your estate.

Pros Of Equity Release

Of course, there are some catches. People often ask if equity release is a good idea, and most experts say it depends on the homeowner’s circumstances.

However, there are some obvious positives to the loan, including the fact that more cases are available in retirement, and the mortgagee can remain in their preferred home.

No Monthly Payments

With an equity release plan, there are no monthly payments. Interest on the loan will accumulate, and remember that the principal and interest are paid when the property is sold. What if the interest accrued over time exceeds 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

Equity release also allows for flexible payment structures. Lenders can choose between a lump sum payment and a regular payment, typically made every few weeks. Those with weaker pensions often benefit from this and use their weekly payouts to live their desired lifestyle.

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. This strategy is popular in countries that have an inheritance tax.

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.

Higher Interest

Interest grows rapidly with equity release, meaning there could be a significant amount of debt by the time of payment. Therefore, equity release is suitable for the short term and thus suits older people who will have less time for the interest to accumulate should they decide to exit the plan.

May Lose Government Benefit

Withdrawing money from your home account may also affect your eligibility for benefits. Typically, older people are covered by a myriad of government programs, but they are very often geared toward income.
The windfall from your equity release might make you too “wealthy” to qualify for these programs.

Loss of Inheritance

Depending on the loan duration and the amount owed, it is possible that no money will remain after the property is sold and the loan is fully repaid.

Caveat Emptor

Buyer beware.  Always seek professional advice from your accountant, lawyer, and financial advisor before taking any action with loans, such as equity release.