Equity Release - Avoid The Pitfalls_50032

Equity release schemes have proved very popular in recent years but just what are the drawbacks? The chance of unlocking some of the cash tied up in their homes is the ideal way of solving money worries for some pensioners but before you enter into an equity release scheme it is important to know the pros and cons.

Senior citizens are opting for home equity release schemes because current pensions and interest from savings are insufficient. A number of people will find home equity release schemes are not for them so you should tread carefully. For instance, if you receive cash from a home equity release scheme this might remove your eligibility for means-tested benefits or help with paying for care.

Equity release schemes allow you to sell or borrow against a proportion of your home in return for a cash lump sum or a monthly income that you can spend over the remainder of your life. There are two basic kinds of equity release schemes: lifetime mortgages and home reversion plans.

Consider the alternatives. Find out whether you qualify for means-tested benefits or other benefits such as Attendance Allowance or Council Tax Benefit. This might be enough to see you through. Also, consider downsizing to a smaller, cheaper property, which might be more suitable for you, anyway. What about using some savings, or, perhaps, borrowing money from the family that could be paid back when your home is eventually sold?

One drawback is the amount that you can borrow will be quite a small proportion of your home's value. Usually, the very maximum you could borrow would be 55% but this would be the extreme. More often, 35% would be the most that you could release from your home. The total depends on you and your spouse's age, health and house value.

A good tip is to only use an equity release plan containing a negative equity guarantee. This means that even if the value of your home falls dramatically you will never owe more than your house is worth. You can be sure that any provider who is a member of SHIP (Safe Home Income Providers) has this guarantee built in, along with several others. These include the right to move house if you wish.

Complexity can be an issue and a lot of pensioners do not fully understand how home equity release works at the outset. However, you can soon get your head around this by reading up on the subject.

What sort of fees the equity release scheme charges will be an issue. You will need to do a calculation on the best scheme for you - it will not just depend on the interest rate. Instead, you have to take into account the overall level of costs now and in the future. This can be quite a task but is well worth doing.

Check the penalties for early redemption (repayment of the loan) and make sure that this reasonable. You never know hen your circumstances might change.
Do not confuse Equity Release and Home Reversion Pans with "Sale and Rent Back." The latter is not regulated by the Financial Services Authority and merely consists of an individual or company buying your house and letting you become a tenant there. You have no rights in these circumstances and you could find yourself facing steep rises in rents if you deal with the wrong people. Avoid those schemes at all costs.

In fact, the Department of Trade recently issued a report saying that Sale and Rent Back is in urgent need of regulation because of the risks it brings to the homeowner. Deal only with a company who is well known, who is a member of SHIP and who is regulated by the FSA and you will be far safer.

People considering equity release should take independent legal and financial advice before proceeding because the details can be complicated and a certain amount of risk may be involved.

Equity Release Schemes sound like a great idea, but do they really deliver? The answer is yes, they can, but you really will need to do some homework before taking one out. Find yourself a specialist Financial Advisor who deals with these plans regularly and make sure that you use a solicitor of your own choice. Some lawyers specialise in Equity Release and you should use one of them. The schemes require carful explanation and a specialist solicitor will go over the details for you and point out the downside. He or she will be on your side and that can be most reassuring.