The Pros and Cons of Equity Releases

Equity releases are a tool a company’s executives can use to pay down debt and attract new investors. The same benefits make them appealing to investors, too. Unfortunately, not all equity releases are created equally, and some have more benefits than others.

What Is Equity Release?

Equity release is a legal agreement between the debtor and a company that allows the debtor to make payments against the value of their home instead of paying the mortgage themselves. The advantage is that the debtor can live their lives as they wish, without being concerned about their home’s equity. The downside is that the debtor is no longer in control of their home, which may mean that they lose out on the added value of the home when they eventually sell it. 

The Pros of Equity Releases

  • Equity release allows you to buy a property and gives you the right to live in it for a set period of time before returning it to the original owner. However, you can only do this if the value of the property has increased by quite a bit.
  • Equity releases are a way for you to stay in your home without having to pay full rent. They are one of the benefits of a home warranty and are not usually required.
  • The arrangement also typically allows you to take a lump sum of money at the end of the term rather than make monthly payments for the remainder of the term. The equity release company called a “trustee” is responsible for collecting the monies, or “debt,” and paying it to the homeowner.

The Cons of Equity Releases

  • If you are owed equity, you have the right to have all or part of it paid back to you at a much lower interest rate. With an equity release, you sell the company your equity, and it repays you the difference.
  • Equity release is often thought of as a good deal for people selling their houses, but sometimes it isn’t so great for the homeowners. This is especially true in the case of flatmates, where the individual seller is usually a flatmate who has the benefit of an equity release.
  • Equity Release is the simplest form of homeownership. You, the homeowner, put up the equity in your house in the form of a lump sum, and when you are ready to leave, you take that equity out of the house. Equity Release allows you to move away or to have an extended holiday while your house is still in your name. It also gives you the ability to move again when you want to, without a large mortgage and without having to consider having to replace your house with a smaller one.

Equity releases allow companies to pay shareholders a lump sum of cash in exchange for a percentage of their ownership. The money is paid out simultaneously, and in line with the tax rules, so there are no extra costs or taxes. In addition, the payments are usually tax-free, which means shareholders don’t have to worry about their own tax bills.

When you’ve worked hard to pay off your mortgage, your savings are all but depleted, and your children have flown the coop, the last thing you want to do is to sell your home and take the proceeds to the bank. It’s a big decision to make and one that can make or break your retirement. The problem is that there’s no easy answer, as every equity release scheme has its pros and cons.

I’ve already attached a valuation table to this post, so I’ll quickly recap the main points:

  • Equity releases are typically fully taxable, but it can be advantageous to claim an equity release as a tax-free lump sum payment.
  • It is possible to claim an equity release as a lump sum; however, it can be difficult to make this happen.
  • If you don’t treat your equity release as a lump sum, it will be taxed as ordinary income.

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