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Are you aware of home equity release risks?

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Did you know that you could use the value of your home to get your hands on extra cash? The process, known as home equity release, unlocks money tied up in property to provide homeowners with a cash lump sum or monthly income.

It’s thought that people over the age of 50 have a total of £750 million equity in their homes. So, with the UK house prices going through the roof over the past decade, equity release have risen in popularity.

However, withdrawing the value held in a property is no easy fix, there can be some serious consequences to releasing the money investing in property.

equity release house

How does home equity release work?

Most equity release schemes involve you borrowing against the property again, but with repayments are often delayed until the homeowners passes away, meaning that there’s no additional financial burden on borrowers.

What are the risks?

 • Feuding families

It’s important to remember that the lender will likely sell your property after your death. This could easily scupper any plans you may have had to pass the house onto children or grandchildren. So, while equity release may boost income in the short term, it can have a major impact on your estate.

• High interest rates

If you thought your original mortgage was expensive, you’ve not seen anything yet. The interest rate on equity release is often twice that of a standard homeowner loan. So, if you’re not careful, you could end up with spiralling debts in just a few years.

• Negative equity

Although equity release can seem like the perfect solution when house prices are high, what would happen if they were to fall again? In the ’90s, thousands of pensioners were stuck in negative equity, meaning debts were higher than the property value. There is now a code of practice, known as SHIP, in place, to prevent it happening, but not al lenders are signed up.

• Check the T&Cs

All equity release schemes have different terms, so it’s important that you know what’s involved before you dive in head first. Important things to ask could be anything from whether you’re allowed to move house or what happens to other members of the household should you pass away.

Tenants rented house

Alternatives

If your pension isn’t paying as well as you’d hoped and you need an income top up, equity release is an option. However, before you go down that route, it’s worth checking to see that you’re not entitled to any benefits.

Many pensioners are able to claim Council Tax Reduction Benefit and other financial help that could prevent the need to unlock cash from your home. Another option is to sell up and move to a smaller, more manageable property. This will also release equity without the need to borrow again.

Equity release can be a great way to use the cash that’s locked away in your home, but it’s important to remember it’s not free money and your property will likely be sold once you pass away.

 

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About Jemma Porter

About Jemma Porter

Jemma Porter is an experienced content creator who has written for a number of online publications. A self-confessed penny pincher; she's often found seeking out the best personal finance deals.

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