Equity release is a way of unlocking some of the wealth tied up in your property without having to sell your home.
It has proved hugely popular in recent years with more than half of financial advisors predicting that the equity release market will exceed £5 billion in 2020 alone, according to research by insurer Canada Life.
Equity release could provide you with a lump sum, regular income payments or a combination of both and some products may allow you to continue to benefit from any increase in the value of your property. Any money released, plus the interest that builds up on it, then gets paid back either when you die, or move into long-term care
However, there are several downsides to consider, not least that you’ll reduce the value of any inheritance you might have planned to leave loved ones, and any means-tested benefits you claim could be affected.
This guide explains how equity release works to help you decide whether it could be an option worth considering.
How equity release works
Equity release is a term usually given to a very specific type of mortgage designed for people aged 55 and over, where you usually don’t make regular ongoing payments. Instead, any interest you owe builds up over time and, as previously mentioned, is only repaid, along with the initial amount of money you’ve released, when you die or go into long term care and your property is sold.
Releasing equity from your home in this way, can in the right circumstances be incredibly helpful. For example, the funds released can be used to pay off debts with much higher interest rates, to cover the cost of essential care for you or a close relative; or to simply boost your retirement income if you don’t have other pension arrangements.
Whatever your reasons for considering equity release, it’s important to remember that you are effectively taking money out of your home. While you can continue to live in it, you will still have obligations to others and you’ll need to check the small print to ensure that you are comfortable with the rights that any equity release firm will have over your property.
Who can access equity release?
Types of equity release
There are two main types of equity release scheme, lifetime mortgages, which are the most popular, and home reversion plans. They differ in their eligibility criteria and also in their pros and cons, but both enable you to access value from your home without having to leave it.
Here’s a simple table to enable you to quickly compare lifetime mortgage and home reversion schemes. It’s worth remembering that taking out any form of equity release product is a very significant financial decision, and they are often highly complex products. It’s therefore always worth seeking independent financial advice to help you decide whether it is right for you and which type of plan might be best for you based on your own personal circumstances.
How much can you borrow and what might it cost?
- A fee (or commission) to the financial advisor who recommends the right equity release product for you
- A valuation fee to determine the value of your property and how much equity you can release
- Arrangement fee and possibly also a completion fee
- Potential early repayment fees for a lifetime mortgage if you wanted to end the scheme
- Legal fees for a home reversion as you must make sure that you understand the terms of your lease to continue living in your home
- Buildings insurance for a Lifetime Mortgage
Equity release pitfalls to be aware of
- Equity release can be an expensive way to access cash compared to remortgaging or downsizing and rates are typically much higher than standard mortgage rates.
- Releasing equity from your home may significantly reduce the value of any inheritance you planned to leave, and may mean you won’t be able to rely on your property later in your retirement, for example, to pay for long term care.
- It can affect any current or future Government benefits you would receive as you’re turning money that was locked up in your home into capital or income. Lots of benefits are means-tested, so this might affect your entitlement to them.
- Equity release schemes can be difficult, highly expensive, or even impossible to unravel if you change your mind.
- You’ll need to consider what would happen if you want to move house in the future. Some, but not all, schemes will allow this but there may be hefty charges involved so be sure to understand how this works.
- Equity release may not be suitable for you, or you may not be eligible if you still have dependents living with you as they may not have the right to continue living in the property if you die or move into care.
Possible alternatives to equity release
If you need extra funds, equity release isn’t your only option. There are several alternative solutions which may help you achieve what you need. These include:
- An unsecured loan – if the amount you need is small and you can make regular payments this may be a good option
- Remortgage – if you are still paying off a mortgage, you may be able to extend the term or borrow more. You may also be able to take out a retirement mortgage and only pay the interest on the mortgage.
- Downsizing – if you need a large amount it may make sense to sell your property and move to a smaller house. Costs can still be high with estate agents fees and stamp duty but you’ll receive the market value for your property and have a clear view of where you stand.