Can Equity Release Be Used As a Means Of Bridging Finance?

A significant number of our customers are interested in using equity release as a short-term tool, so the question is, equity release – can it be used as a means of bridging finance?

Traditionally, equity release loans were intended to be a long-term scheme, which is why equity mortgages are referred to as lifetime mortgages – because you are supposed to have them for life.

However, times are changing, and equity release is adapting slightly, so it is possible to use equity release as a means of bridging finance.

Is it something we would recommend over using equity release long term? For most homeowners, the answer would be no, but certain people could benefit from doing this, so we do not discourage it in every situation.

Please call our 24-Hour Helpline: 0330 058 1579

What Does Bridging Finance Mean?

When we talk about bridging finance, we mean using a loan as a means to an end. In other words, you would take out a loan to fund your life before having access to more money.

The most common situation we see this in is when someone wants to purchase a new property, but the sale of their current property has not yet been finalised, so they need a lump sum of money to carry them through before their home is sold.

The reason people take out a loan in this situation is that they know they will eventually have the means to repay the money and stabilise their finances, but they need a push to do this as the money is not yet available to them.

Though some people choose to borrow from family and friends, not everyone is in the position to do so, and this is when they may get involved with bridging finance.

Please call our 24-Hour Helpline: 0330 058 1579

Can Equity Release Be Used As a Means Of Bridging Finance – The Short Answer

Despite the fact that equity release has been designed as a long-term scheme, it is possible to use it as a means to bridge finance, or in other words, as a form of short-term finance.

If you are interested in doing this, make sure you find an adviser who is regulated by relevant bodies, including the Financial Conduct Authority (FCA) and the Equity Release Council (ERC), as they will help you select a suitable plan that does not leave you in a financially vulnerable position (1).

Why Would You Consider Using Equity Release As a Means of Bridging Finance?

Firstly, lifetime mortgage loans do not have to be repaid as they are paid back through the sale of your property, which only occurs when you pass away or move into permanent care.

You may be thinking ‘why would this be a benefit if I am after a short-term scheme?’

The answer is that, even if you plan to use equity release as a way to quickly pay something off, and you expect that you will be able to repay the equity loan fast, you cannot be certain that this will happen.

Taking out an equity release loan provides you with financial security to lean back on, as if your expenses are higher than normal or you have to find emergency funding for something unexpected, you would not have to worry about repaying the loan and being out of pocket.

Secondly, you may have something specific in mind that you want to spend your money on, and equity release allows you to do this as it has many different plans to choose from.

It is true that the same applies to traditional loans, but the interest rates tend to be significantly higher on these.

If you take out equity release on a short-term basis to fund a second home, holiday home, or rental property, you could be paying very low-interest rates, which would be even more beneficial if you opted to repay the interest each month, as there would be no interest to repay at the end of the scheme.

Finally, not everyone is in the position to qualify for a traditional loan, as they often come with credit checks and income checks.

Most equity release schemes do not involve these checks, so it would be easier for homeowners to be entitled to a lifetime mortgage loan, meaning the simplest solution for a short-term income boost could be to take out equity.

This mainly applies to homeowners who have adverse credit currently, or who are sometimes known as bad credit customers.

Please call our 24-Hour Helpline: 0330 058 1579

Are There Any Reasons to Avoid Using Equity Release As a Means of Bridging Finance?

Here is the first reason to carefully consider whether using equity release to bridge finance is a good idea: equity release has never been about accessing funds for a short period of time and repaying them as quickly as you can.

The concept of equity release is about as far away as you can get from a short-term scheme – it is designed for you to not have to make repayments, and for you to stick with the scheme for the rest of your life.

This means that some equity-release mortgage lenders actively punish homeowners who leave the scheme by charging them with an early repayment fee of up to 25% of the money they have borrowed, which would clearly not happen with a traditional loan.

Secondly, though equity release variable interest rates tend to be on the lower side, the interest does accrue over time, so it can build up rapidly, meaning you end up owing a lot more than you would with a traditional loan.

If you have not prepared for this, you may find that you cannot afford to repay the loan and finish with equity release for a good while.

Finally, releasing equity can have an impact on any means-tested benefits you are receiving, so it may not be a good idea to do this if you are claiming benefits and you rely on this money each month.

However, this is not true in every case, so check with an equity release expert if you are worried about this.

Please call our 24-Hour Helpline: 0330 058 1579

What Else Can You Use an Equity Release Loan For?

Lifetime mortgage loans do not tend to be used as a means of bridging finance, but there is not one specific thing homeowners use equity release on, as it is dependent on the specific situation of the equity release customer and their family.

We love hearing stories of equity release consumers who have used their loan to fund the education of a family member, as this will have a long-term impact and it is a great way to beat generational poverty, given that you can release equity without having to prove you earn a high income.

We also enjoy hearing about pensioners who have taken out equity to make the most of their retirement, and they frequently go on luxurious family holidays and excursions that they would have never been able to enjoy without having an equity release loan.

With the rising costs of living, it is also refreshing to hear of people who use later life lending such as equity release to make their retirement more comfortable.

They often do this by using their loan to help pay their weekly and monthly bills, keeping them safe and warm.

Finally, many of our customers have released equity to purchase a second home, and this is wonderful to hear as it means they can enjoy two properties in their later years.

Often, one property is closer to family and friends, so they can enjoy quality time with their loved ones, and the other may be in a location they prefer, so they get the best of both worlds.

It is also known for homeowners over 55 to take out equity to pay off existing debt, and this is a huge weight off their shoulders as their previous debt had to be repaid by a certain date, whereas the equity release loan does not have to be repaid while the homeowner is alive.

Please call our 24-Hour Helpline: 0330 058 1579

Should I Use Another Method Of Bridging Finance Before Releasing Equity?

Instead of releasing equity, you may decide to opt for alternative finance options such as a traditional loan, as the monthly interest rates may be lower and it is easier to make monthly payments.

However, keep in mind that you would be required to pay this back in the near future, so you would have to be confident that you would be able to afford this.

You could also bridge finance by borrowing a lump sum from someone that you trust, which would be a quick process and would not have to involve advisers, specialist lenders, or solicitors. Some people prefer this as it is less hassle due to the lack of administration.

However, not everyone can borrow from a trusted individual, as not everyone is prepared to lend money to you. You would also have to trust that you would be able to repay the money within a suitable timeframe, and this is not always possible if you are struggling to make ends meet.

Some people decide to downsize in order to bridge finance, as they don’t have to take out a lifetime mortgage loan and they may find it easy to sell their home depending on the home’s value (determined by a property valuation that comes with a valuation fee) and location.

However, research has found that 81% of equity release consumers would have been financially worse off if they chose to downsize instead of releasing equity (2).

Please call our 24-Hour Helpline: 0330 058 1579

Speak to an Adviser to Find Out More

To find out more about using equity release as a means of bridging finance, or for niche advice on bridging finance with equity release, please get in touch with our team on 0330 058 1579.

If they believe you are not a suitable equity release consumer given your intent to bridge finance, they will recommend a suitable alternative that will be better for you financially.

Our bespoke advice would benefit anyone considering equity release, even if you or your partner are not yet committed to the concept.

We are proud to offer niche advice that is tailored to your situation and that takes into account a wide variety of funding options. For this reason, our customers can vouch for us when we say we offer a fantastic service.

Please do not rule out the idea of sticking with an equity release plan for the rest of your life. The high interest and inheritance issues may deter some people, but more research into equity release shows that there are ways to keep interest low and to protect inheritance funds for your loved ones.

There are many misconceptions about equity release that prevent people from pursuing this route, and we want to ensure you have the tools to make a sensible decision about equity release by weighing up the pros and cons instead of dismissing it without cause.

If you aren’t ready to speak to an equity release expert just yet, head over to our help centre where we answer some frequently asked questions about equity release, including the disadvantages of releasing equity, how long the equity release process takes, and whether you can release equity if you are under 55 years old.

We also offer a free equity release calculator that you can use to discover how much money you could release from your property, provided that you fit the eligibility criteria for equity release.

This means you must own property worth at least £70,000, and you must be aged 55 or over.

Please call our 24-Hour Helpline: 0330 058 1579

References

[1] Homeowners urged to ‘use equity release for the right reasons’ https://www.whatmortgage.co.uk/news/equity-release/homeowners-urged-to-use-equity-release-for-the-right-reasons/

[2] Equity release better option than downsizing for majority of borrowers – Responsible Life https://www.mortgagesolutions.co.uk/news/2022/06/06/equity-release-better-option-than-downsizing-for-majority-of-borrowers-responsible-life/