What are the Disadvantages of Equity Release Schemes?

For a lot of people, equity release is the answer to insolvency during the later years of life. Once the land registry has been duly notified, an equity release scheme allows you to retain occupancy of your home, and to receive monthly loan payments which help you to cover the costs of day to day living.

In most cases, the equity release scheme extends beyond the lifetime of the borrowers and this makes the issue of repayment fairly unproblematic: the bank or other lending third party simply sells the property as a deceased estate and thus reclaims the debt.

However, there are some disadvantages to the conventional equity release scheme. To begin with, you will need to consider the fact that the inheritance you leave to your family will be significantly reduced. While it is possible to borrow only part of the value of your property, the accumulation of interest will invariably sap money from the remaining worth.

This disadvantage is highly dependent on the equity release scheme you decide to take out. If you take close to 100% value of your home, then you will certainly leave nothing for your beneficiaries. Most schemes are set between 20% and 50% for equity in order to avoid over extending your loan. Some companies only offer up to 44% of the house equity in an equity release.

The interest will accrue in an APR or annual percentage rate which can vary from 5% to 8%, on average. The higher your interest rate the more your loan will end up being based on your actual life. If you take out an equity release after notifying the land registry and you live for 10 years versus someone with 20 years left there is a chance of leaving behind an inheritance.

Another way to leave an inheritance behind is to choose from interest only or drawdown lifetime mortgages. Interest only life time mortgages require a payment on your account each month. You pay only the interest that has accrued during that time leaving the principle balance until your death or you decide to move into a new place. Since you pay the interest off, the value left in your home goes to your beneficiaries. Of course, disadvantages exist for this type of lifetime mortgage since you need the disposable income to make these payments.

Drawdown mortgage still earns interest; however, it is on the amount you withdraw rather than the amount of equity released to you. The equity is kept in a withdrawal account that you can access anytime you need funds. It works with an initial lump sum and then you draw what you require. As long as you are careful in what you draw you can work to save some inheritance for your family.

In addition, equity release is not a good option for anyone who does not yet own their home outright. If you are still paying off your mortgage, then you will only be able to release equity from your property to the value of the difference between the amount you still owe and the worth of the home. It is harder to obtain a lifetime mortgage equity release when you do not own your home in full. It also makes it harder to pay back the entire loan amount after death because your main mortgage will not have a negative equity clause.

There is a second choice to equity release schemes other than lifetime mortgages. It is called home reversion. Home reversion allows you to sell a part of your home. In this situation you must own your home in full. You cannot have any outstanding mortgage, loan or equity release on it. The reason for this is due to home reversion and how it works. You sell a part or all of your home. You remain in the home under a lifetime tenancy agreement that requires no rent payment; however, the home is sold in full at your death or when you move out. The home cannot be saved as the inheritance. However, you will have a lump sum inheritance left based on the home value.

In short, equity release can be a useful strategy by means of which to finance your retirement years. However, it is not without its disadvantages. If you are considering signing on to a scheme, you will want to make the decision very carefully and get plenty of advice. Be careful talking with the land registry before you are really ready to sell your home or take out a lifetime mortgage.