Is your equity release plan stopping you from leaving an inheritance?
When we retire, many of us want to use some of the cash tied up in our home to enjoy life. Whether it’s going on that once-in-a-lifetime holiday or helping family members with a step onto the housing ladder, our reasons for using equity release are varied - but you might also want to watch out if you want to leave an inheritance.
Equity release is a scheme that is available to over-55s and allows you to borrow money against the value of your home. It’s a way of unlocking wealth, tax-free, and you don’t have to repay it until you sell the property.
It sounds great but watch out.
Interest on that debt can spiral quickly. According to data company MoneyFacts, average equity release loans stand at an average of 6.26%, compared to around 4.96% of an average 5-year-fixed mortgage.
The effects of compound interest - where interest stacks up in addition to interest already paid - mean that a £50,000 loan could double in just 11 years.
In spite of this, equity release remains popular.
The number of loans taken out has increased every year since 2012. In 2022, more than £6 billion was unlocked in the form of equity release loans.
It’s tax-free, so many people see it as a way to enjoy some of the hard-earned rewards their property has afforded them. Others see it as a way to give a cash lump sum to children or grandchildren so that they can see them enjoy it or help them get on the housing ladder - and there may be no inheritance tax to pay depending on your financial circumstances.
It’s easy to see why it is attractive, but as always, equity release needs to be treated with care and expert advice should be sought.
Debts can mount so high that it can eat up the value of your property.
It means if you die or go into care, you may have no physical asset to sell or leave to your children.
What some people choose to do is repay some of the debt to help with the spiraling costs. One couple who were interviewed in the Sunday Times recently, said they borrowed just under £35,000, but to avoid debt ballooning, were paying around £200 per month towards the loan.
According to that same article more than 90,000 people paid back £102 million in equity release debt in 2022 - an increase of 48% compared to 2021.
Benefits of paying back
The Times article quotes Key, an equity release adviser, that says if you are able to pay back some of the debt, it really could make a lot of difference. For example, if you borrowed £100,000 at age 70 at 5.51%, after 15 years your debt would have mounted to £228,098.
By repaying £100 per month, the debt would be reduced to £200,200 in the same time and if you could afford to pay £459 a month, the debt would remain at £100,000 after those 15 years.
Some lenders have repayment caps - so you might be limited as to how much of your loan you can repay within a certain time. How much you repay will depend on any terms imposed by the lender and you will need to carefully check your paperwork, as overpaying that limit can have costly consequences.
There can be other complications if you lack capacity to enter into an equity release plan. If you have appointed attorneys under an LPA, they do not have authority to sign this on your behalf without authority from The Court of Protection.
If you’re considering equity release and would like some legal advice, contact the Private Client team at Downs Solicitors to see how we can help. You should also take financial advice from a suitably qualified Independent Financial Advisor.