Making Money From Your Home
In a great number of cases, an individual’s home is their most significant asset. Many people, however, do not realise that this asset can be utilised not only as somewhere to live, but also as method of generating capital. The effective financial management of a home can produce much needed extra cash. Property prices have risen acutely in the past few years and, as such, many people are unaware of how much their home is worth. It may seem frustrating that, aside from providing shelter, the potential of this asset is not being tapped. With an equity release scheme, however, it is possible to make use of some of the capital locked up in your home.
Equity ReleaseEssentially, equity release schemes are a loan to a homeowner. At the most basic level, they allow an individual to borrow against the value of their home, and for this money to be recouped upon their death. You might be able, for example, to borrow 10% of the value of your home through such a scheme. Upon your death the property would be sold, and the 10%, plus interest, would be repaid to the lender from the sale proceeds.
Clearly, equity release can be an attractive option for those who require a bit of extra cash. It is common, for example, for individuals to make use of such a scheme in order to perform essential maintenance tasks on their property.
Pros and ConsThere are a number or potential drawbacks associated with equity release, however. Primarily, it should be remembered that once you have borrowed the capital you have essentially re-mortgaged a portion of your property. As such, if you subsequently wished to sell your home you would have to pay the creditors from the proceeds. This poses particular problems as equity release schemes tend only to be available to those over the age of 60. Some have found that, having already borrowed against too large a proportion of their home, they could no longer afford to pay for necessary care from the proceeds of the sale of that home. As such, it is vitally important that you do not borrow too much through such a scheme.
There are, however, significant advantages associated with these schemes. Primarily, any capital derived from equity release will be free of tax unless it is subsequently invested; in these cases you may have to pay tax on growth or investment income. The schemes can also be used as an efficient way of mitigating a potential Inheritance Tax (IHT) bill, while ensuring that the owner of the property is able to enjoy the use of their asset during their lifetime. If the proceeds of an equity release scheme were placed in trust, for example, they could be separated from the estate of the borrower. In this way, the total value of the estate could be brought within the IHT exemption limits. As such, equity release can also present a tax efficient method of giving.
Equity release is a very significant decision, and one which requires careful planning if it is to be efficient and safe. As such, you should always seek the advice of an independent financial advisor if you are considering making use of such a scheme.