Before Considering an Equity Loan

For some people, an equity loan may not be the most appropriate option. For example:

1. If you need to raise only a small amount of money

Lenders may have a lower limit on the amount they are prepared to advance, but if you do not need this much the arrangement could prove unnecessarily costly.

2. If you have savings you can use instead.

Losing interest would probably be cheaper than paying interest because the cost of an equity loan  is quite likely to exceed any return you can safely expect from savings and investments. Also, bear in mind that as your savings reduce you may become entitled to means-tested help and benefits.

3. If you need to raise a larger amount of capital than an equity loan can provide.

Your day-to-day living costs may have gone up while your income has stayed unchanged, or gone down, due to inflation or low yields from investments or savings. You may want to get hold of a cash lump sum to pay for repairs or adaptations to your home, or to replace a car or pay for ‘extras’ such as holidays.You may want to raise some cash to help your children or grandchildren.Turning some of the value of your home into cash can help pay for any of these things – cash raised through an equity loan scheme does not have to be spent on your home or used to buy an annuity.

It is, of course, vital that you realise that once you spend this money, it has gone – just as if it had been any other kind of savings or income.You need to consider very carefully just how urgent your financial needs are, and whether an equity loan scheme is the best way of solving the problem. Any equity loan you take out will have an effect on the equity in your home, and on the value of your estate when you die. More information is given on this later.

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