As anyone looking to release equity from their home or other valuable asset will know, the business of using your property to secure a regular income has both positive and negative elements. Before you sign up for an equity release scheme, you will want to make sure that you have a handle on both of these. If you consider only taxation on property, for example, equity release schemes appear to offer borrowers a very good deal.
They provide the home owner with a steady stream of tax-free payments, apportioned from the total value of the property and this is clearly positive if you are looking to borrow money against your house.
Cons of Equity Release Schemes
However, in addition to this useful feature of the equity release scheme, there are also several negative repercussions which borrowers should take into account before they take out a loan. To begin with, your equity release programme is bound to decrease the amount of capital and property that you leave as inheritance to your loved ones.
As well as this, in certain countries, you will find that participation in an equity release scheme will adversely affect your means test score, and this can seriously impact the amount you are required to pay in social security benefits.
Leaving behind something for your beneficiaries can be extremely important to you. There are both good and bad sides to equity releases in this concept. First, you may not be able to leave an inheritance behind or it may be a significantly reduced inheritance.
The bad side is that inheritance is compromised based on the type of lifetime mortgage or home reversion plan you choose. At the end of your life, the property is sold and the entire value of the home may be necessary to pay off the capital sum plus all the accrued interest. With home reversion you may have sold the entire home leaving nothing to be sold at the end of your life.
The good side can be in the amount of your estate. Capital gains tax is something you have to pay each year when given a certain sum of money. If you provide your beneficiaries with some of the lump sum now and do not exceed that taxed sum allotment they receive their inheritance without issue. Larger estates upon death are subject to inheritance tax. By offering a small sum over the space of several years under the amount of being charged capital gains tax, your beneficiary can avoid the inheritance tax problem.
For some this also means gaining a helping hand from their parent or grandparent when they need it versus years later when they may not have financial issues or had to go through bankruptcy due to financial issues. Sometimes it is a good thing to give when you can in life versus waiting till later on. Not always but it is a way to look at lifetime mortgages and home reversion in a positive light.
Other Factors to Consider
Taxation of property is just one factor. You also have to consider if you can get what you need out of the equity release. While it is free of taxation, you might take out a lump sum only to find in 10 years you need more with no possibility of gaining more equity.
Rather than get into a negative situation like this it is possible to take a drawdown account approach. Obtain a lump sum for the first 12 months which is only what you feel you need for that period of time. When you need more funds you can take them out.
It prevents you from using up the money too quickly when you didn’t need it all in that first little period. It also helps on the interest and inheritance issue.
As interest compounds it takes away from the home value, thus inheritance lowers. But with a drawdown account, you are only charged interest on the funds you use. Any equity left in the drawdown facility is not considered taken; therefore, interest is not going to increase that portion of the sum. As you can see there are many elements to consider before you sign on the dotted line taking out the loan.
In short, equity release has both positive and negative elements, and both of these need to be considered before you embark on the process of borrowing. As with any financial decision, it is very important that you enter into the situation well-informed of all risks and benefits rather than focus just on taxation of property.