Why should your parents think twice about equity release? We’re not saying that they shouldn’t consider it at all. But, unlike purchasing a new dress or an outlandish spontaneous dinner, equity release is a life-long commitment that cannot be decided on at a whim.
Instead, unlocking equity from their home must be a well-thought-out journey, with top professional support to guide them through the process.
What’s Equity Release?
If you’re living in the UK and haven’t heard of equity release, you’d best update yourself on this multi-billion pound industry that is taking the UK retirement community by storm.
With the majority of UK homeowners above the age of 55, equity release plans allow them to unlock the value of their property while still living there, rent-free, for the rest of their lives. Furthermore, no payments are required in the homeowner’s lifetime. Instead, the loan, and compound interest, are repaid when the home is sold once the last owner dies or moves to a care home.
In addition, your parents could use the money they release in any way they wish, including giving you and your siblings an early inheritance.
While equity release is a fantastic opportunity to give your parents the best of both worlds, it comes with its pitfalls and risks like all financial products. Luckily, we have here an Equity Release Specialist – Jason Stubbs from EveryInvestor, ready to tell us more about whether equity release scheme might turn out to be a worthy idea.
A Risk Involved with Equity Release That Your Parents Must Know
Equity release is a risky product because of the compound interest catch. Lifetime mortgages, the most popular equity release product on the market, come with fixed interest rates that usually compound annually.
While your parents may unlock up to 60% of the value of their property, depending on their lifespan, the interest might end up using the full property value, leaving you less of an inheritance.
Luckily, equity release products come with a ‘no negative equity guarantee’ that secures your family from owing more than the home’s final sale price. Any additional debt will be written off, so you won’t be left with debt when they pass away.
However, if your parents wish to, they can pay off the interest monthly to stop it from compounding. They can also repay up to 10% of the loan amount annually, drastically reducing the overall debt.
Equity Release is Safe
Despite this and other pitfalls, equity release products are safe as they have their own governing body called the Equity Release Council. Their primary focus is on ensuring the industry is corruption-free and safeguarding the homeowners’ interests.
If your parents do want to opt for an equity release product, insist they select a lender with an Equity Release Council membership. Finally, The company must be registered with the Financial Conduct Authority (FCA) as they oversee the entire financial industry in the UK.
If your parents have reviewed all the pitfalls of equity release and considered all the alternative ways to raise money in retirement, then the next step is to get in touch with a financial adviser who would be their guide throughout the process. An adviser will also inform them if equity release is a wise choice under their circumstances.
A whole market financial adviser is always your best bet when it comes to equity release, as they have access to the entire industry, giving your parents a wide range of options to consider.