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Last update : September 2010
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Alternatives To Equity Release
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| Equity Release plans, including Home Reversions and Lifetime Mortgages, are far from perfect financial products. They can be both expensive and inflexible and so for many people they should be considered only as a last resort.
So what are the other options available to the older generation to release built up wealth in their properties? Read on.
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FREE Equity Release Guide
- This LearnMoney guide offers a simple 5 Step process outlining exactly how to properly research the Equity Release market
- It make sure you ask the right questions and get proper answers
- Concentrates on the all-important costs and flexibility of the different Equity Release schemes
- More details and to download your FREE copy
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| Alternative 1 : Downsize your property |
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The main alternative to Equity Release is to downsize your property, ie move from a £200k house to a £100k flat. The advantage to this strategy is that no money has to be borrowed and therefore no interest can build up in the future.
Take moving costs into account though. These will include fees for estate agents, solicitors, stamp duty fees, removal company etc. They can add up and for a medium priced property can easily top £10,000.
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| Alternative 2 : Borrow from family members |
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Instead of selling all or part of your property to an equity release firm or taking out a Lifetime mortgage perhaps some family members can buy the property (or part of it) and then you sign a long term lease to continue living there.
However, this is not as easy as it sounds and can lead to potential problems in the future. For example -
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- If your son were to buy the property and is then declared bankrupt you could be evicted as you're just a tenant
- Or if his marriage were to break down the house could be disputed in any divorce hearings
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Complex tax situations might also arise, especially if the property was sold for a discounted rate. In such a circumstance the taxman, as well as the relevant local authority, could take the view that the parents have effectively given a proportion of their property away, and this would be considered part of the taxable estate at death.
If you want to explore this route it's critical that you take good legal and tax advice.
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| Alternative 3 : Use your savings and any investments first |
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If you have any built up savings or investments consider using these before any Equity Release deal is signed. Remember, your property will always be there so there's no need to release equity from it if you have other forms of cash available.
If you have any investments it might be a good idea to seek professional advice before you do anything. Some investments are tax-free such as ISAs or maybe you've got money semi-locked up in specialised financial products.
In both of those cases selling or accessing the money without proper planning might mean you're leaving cash on the table.
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| Alternative 4 : Sell and Rent |
| This is an interesting alternative to equity release but should only be considered by those owning a property worth in excess of £400,000. The basic principle is this - |
- You sell the house yourself, ie not to an equity release company
- The money is then invested into safe income producing investments (bonds and the like, not stocks which can lose significant value)
- The income you receive should be sufficient to allow you to rent a property and also to fund your monthly living expenses
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The main advantages are that you can move to wherever you want, and also there are no maintenance or breakdown costs as these will be met by the landlord.
The main disadvantage is that there will possibly not be sufficient money available for living expenses after you have paid the rental. This is the reason why this alternative to Equity Release should really only be carried out if your property is worth more than £400k.
If your monthly income from the sale proceeds is not much more than the monthly rent you will have to dip into your savings every month. This might not be a problem if you die within a short period of time but if you or your partner live for a considerable amount of time the funds might sink considerably.
Still, for some people it is a genuine alternative to a traditional equity release deal and something that should be considered.
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| Alternative 5 : You might be eligible for local grants to improve your property |
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If you don't need a lot of money but at the same time need cash to repair your property consider applying for a local or government grant.
These are often available for the older generation as part of the local council budget.
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| Alternative 6 : Consider Remortgaging |
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Remortgages are often overlooked by those considering freeing up cash from their property. Not all mortgage providers will deal with retired people but some do. Call a Mortgage broker up for an initial chat and see what they say.
However, you will normally need to prove some sort of income to make the monthly repayments. The advantage to remortgaging is that both the interest rate is usually lower than an Equity Release deal and you're offered far more flexibility. So if you want to cancel the mortgage or refinance it in 2-3 years the repayment penalties are usually reasonable.
Often the best mortgage to use would be an interest only one. This means the monthly repayment only covers the interest and not the principal. A detailed description of interest only mortgages can be found here.
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| Alternative 7 : Consider taking out an Interest Only Mortgage |
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| Alternative 8 : Check your benefits entitlements |
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Maybe you don't need that much extra money for living expenses and therefore Equity Release might seem rather drastic.
If so check you're receiving all the State and local benefits you're entitled to. A good way to do this is to make an appointment with the Citizens Advice Bureau.
Plus don't forget the Taxman offers free advice - Find your nearest office to call by using this link.
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| Alternative 9 : Rent a Room |
| If your property is large enough consider renting a room out to a lodger.
The taxman has a 'rent a room' scheme and you can receive up to £4,250 per year tax-free - Rent a Room
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| Summary |
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We often want the best of both worlds - to continue living in our present homes while having some more cash in our pocket.
Sadly for many people this isn't possible so hard choices have to be made.
If I had to make such a choice I would probably downsize my property and then use the excess cash to create an income.
My reasons for doing this wouldn't just be related to the fact that Equity Release can often be both expensive and inflexible. Rather, we often spend our whole life borrowing money and so are in debt, regardless of whether it is from loans, credit cards or of course a mortgage.
So heading into late life I think it's a prudent decision to try to do everything possible to reduce or limit our personal debt burden.
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