Whilst equity release can provide a financial lifeline for some people for others it can be a disaster. Most of the time the issues aren’t uncovered until after the borrower has passed away. It can come as a nasty shock to those expecting to inherit a property to find that there is a substantial mortgage against it to be repaid or worst still it is actually owned by a bank or investor.
Accepting that equity release has its uses in some circumstances there are steps that can be taken to minimise the impact. The most obvious one is to make those expecting to inherit aware of what you’re doing. Of course, you’re under no obligation to, however rightly or wrongly, their own retirement or mortgage repayment plans may involve the expected inheritance. If they know they’re not going to get as much as expected they can start to plan accordingly.
Ensuring you use the right product is also essential. The term equity release is officially used to cover lifetime mortgages and home reversion schemes, although people frequently use it to refer to “lifetime leases” on newly purchased properties. Lifetime mortgages need to be repaid on death but you retain ownership of the property and benefit from any increases in value. With the other options an investor or bank buys some or all of the property for a substantial discount and you retain the right to live in it for your life only. Usually, even though you don’t own the property and are not benefitting from any increase in its value you’re still responsible for its insurance and maintenance. I’m yet to have a case where a lifetime mortgage is not a better option for both the borrower and their beneficiaries.
Rates and fees vary massively between providers and brokers. Equity release lenders will pay brokers a commission and this is included in the interest rate you pay, however some brokers charge a fee in addition to this. They’ll often say don’t worry it can just be added to the loan but this in fact means you’re paying interest on their fee as well. Finally, paying the lowest interest rate possible seems obvious but is often overlooked and with compounding can make a difference of tens of thousands of pounds over the long term.
By Richard Cohen FPFS ACII MCSI Chartered Financial Planner
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