Death planning guide: equity release – the pro’s and con’s
Money Savings Expert Martin Lewis has compiled a checklist of 20 things you need to consider when planning for the financial well-being of your family (it’s on his website). The check-list includes tips on wills, inheritance tax, funerals and setting up power of attorney. Our last post addressed the importance of telling your next of kin where your will is. This post covers releasing equity in your house.
Equity release is commonly marketed as a way to spend a home's value while still living in it, either by taking a loan or selling part. Do this and if you've dependants, less money will be left for after you've gone. But if you don't have any dependants, it isn't an issue.
While rates don't sound much higher than ordinary mortgages, they often cost much more. No repayments are made until you die, so the interest compounds rapidly.
For example: Borrow £20,000 aged 65 at 6.5% on a £120,000 home and live 25 years, and when you die £100,000 needs repaying. Though house price rises can offset this.
Make sure you read these key points first...
- It's less of an issue if you've no dependants. If you've no one to leave the property to, you lose nowt as the debt's repaid from your estate when you die.
- It can affect your benefits. Having cash rather than a property can hit those eligible for benefits such as pension credit.
- Explore downsizing instead. For many, a cheaper way to release equity is to downsize – sell and move to a smaller home. So explore this, but do it sooner – anecdotally, while many still feel up to moving in their sixties, as they get older the disinclination to move sets in so it's much tougher.
- You typically have to be at least 55 to do this. Plus, the younger you are, the less you can usually borrow.
- Ensure the company's a member of the Equity Release Council (formerly SHIP). This trade body's members all guarantee your estate will never owe more than your home is worth.
- Wait as long as you can. As a rule of thumb, at a rate of 7%, the amount you owe doubles every 10 years. Therefore the longer you wait, and the less you borrow, the lower the impact on your estate.
- Don't think "I may as well do it in one go". For example, if you think you may need £40,000 from your house to cover 10 years, see if it's possible to get £20,000 now and the rest in five years. It'll usually work out much cheaper, plus you may need more cash later for long-term care.
- Speak to an independent mortgage broker. If you're seriously considering this, speak to an independent mortgage broker or financial adviser with an equity release speciality to find the best deal. See the MSE Mortgage Broker finding guide.