Starting a new business venture is an extremely exciting prospect for many, and especially so for those approaching retirement age. New business ideas can give a new lease of life to those far into an existing career, and even be a nifty way to bolster retirement income. However, funding a new business is difficult in today’s economic climate. For those over 55, there is a unique funding option in the form of equity release – but what is it, and why might you consider it?
What is Equity Release?
Before we continue, though, what exactly is equity release? Equity release is a general term to describe a suite of financial products, each of which engages with the equity you have locked up in your personal or domestic property. For many private citizens in the UK, their home will be the single most valuable asset they own – value, crucially, that cannot be leveraged without selling or renting it. Equity release products see part of the home’s value loaned back to its residents, in several different ways.
The most common form of equity release is a ‘lifetime mortgage’, wherein a portion of a home’s equity is paid back to a homeowner as either an annuity or a lump sum; they will often pay only the interest on this loan, which is recouped only when the house is eventually sold. Another key form of equity release is ‘home reversion’, where a portion of the home is directly sold to the lender, and the homeowner remains through a repaying of partial monthly rent.
Equity Release as Funding Source
So, what makes equity release a viable funding source for a business venture? For one, it is important to acknowledge the present economic difficulties facing many markets – difficulties which have resulted in many enterprises closing their doors in terms of investment or seed funding. As businesses batten down the hatches in preparation for recession, opportunities are fewer to receive bursaries or investment funding.
Alternative means of business loans, meanwhile, can be costly to consider. Major banks are incentivized to cover themselves from risk, with high-interest rates as the general solution. Equity release allows you to unlock your funding from your sources, without endangering your living situation either.
Key Considerations
Of course, equity release is not a process that should be entered into unwittingly. Different lenders will have different forms of agreement within their equity release programmes, the specifics of which can trip individuals up in certain circumstances.
It is also easy for some to forget that equity release loan schemes are just that: loan schemes. There is an element of risk to equity release just as there is an element of risk to any other loan, even if it is secured against your home. Compound interest, and the decision to pay back a bare minimum, can result in major impacts on the size of your estate when it comes time to sell your home. With the right preparations, though, these issues can be managed and mitigated.