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Equity release may appeal if you want to unlock some of the wealth tied up in your home, particularly if you’re finding it hard to make ends meet and you don’t have cash savings to dip into.
When you release equity from your property, you can usually choose whether you want to receive a lump sum or regular income payments, or you may decide on a combination of both. Interest on the money released rolls up over the years, unless you’ve chosen to make repayments, and is typically repaid when you die, or move into long-term care and the property is sold.
Equity release is a major financial decision and you’ll need to seek professional advice to help you work out whether it’s the right option for you, as there are a number of downsides to consider, not least that it will reduce the value of any inheritance you might have planned to leave loved ones.
It may be, for example, that an alternative way to produce a lump sum or income is more suitable, although this will very much depend on your personal circumstances.
Here, we look at when equity release may be an option worth considering, and when it may not be right for you.
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If you’re considering releasing equity from your home, Rest Less members can book a free consultation from Fidelius. Speak with a qualified, FCA-regulated financial adviser you can trust. Rated 4.7/5 on VouchedFor from over 2,600 reviews.
How does equity release work?
You can usually only take out an equity release plan if you’re over the age of 55, but there may be alternative options if you’re not eligible (see below for more information).
Equity release is essentially a special type of mortgage product that’s designed to provide a lump sum or regular payments, but without the need to make monthly repayments. The interest you owe instead rolls up over the years, and it’s typically only repaid, along with the amount you originally released, when you die or go into long-term care.
Once you’ve released equity from your property, you can continue to live in your home, so you don’t have to face the upheaval and stress involved in downsizing. You can find out more about how equity release works in our guide Equity release – what is it and how does it work?
There are two types of equity release plans, lifetime mortgages and home reversion plans. With a lifetime mortgage, the equity release provider doesn’t own any part of your property, but instead you borrow money secured against your home (which must be your main residence). Find out more about how lifetime mortgages work in our article Lifetime mortgages explained.
These plans have become increasingly flexible in recent years, offering the option to repay some of the interest owed if you can afford to. Learn more in our article Can I repay equity release or a RIO mortgage early?
A home reversion scheme, however, involves selling a percentage of your home to the equity release provider in return for a cash lump sum (these are far less popular than lifetime mortgages, making up less than 1% of all equity release plans taken out). Learn more about home reversion in our article Home reversion – what is it and how does it work?
When might equity release be the right choice?
For starters, there are a number of eligibility requirements, so you should check these out before thinking about whether equity release is a possibility for you. You can find more information on the eligibility criteria in our article Am I eligible for equity release?
Equity release may be suitable in a number of scenarios, but it will very much depend on your individual circumstances. You might want to take out an equity release plan if, for example, you have a mortgage or other debts you want to pay off, or if you need to increase your retirement income if you’re facing a shortfall, particularly given current steep living costs. In these circumstances, releasing equity from your home could be helpful, especially if you want to continue to live in your home and don’t want to have to downsize to free up cash.
It may also be suitable for you if you don’t have children or other family who you wish to pass on an inheritance to, and so you want to focus on enjoying your life by making the most of your assets now. You can find out more about this in our guide How to plan for retirement if you’re not leaving an inheritance. Alternatively, you may desperately need the money to fund care in your own home, as you don’t have enough income to pay for this. Find out more in our guide How to pay for long-term care.
If you think equity release might be an option for you, you can see how much wealth you could unlock from your home with this free, easy to use calculator. Fill in a few details to get an estimate – and if you’d like some advice, arrange to speak to an expert.
When might equity release not be the right choice for you?
It’s important to remember that while you don’t have to make regular repayments on your equity release loan, as these are essentially delayed until you die or move into care, you still have obligations to your provider. The debt must be repaid at some stage, and as mentioned, could substantially reduce the amount you can leave in inheritance to your loved ones.
Bear in mind, though, that you could consider passing on some of the equity you’ve released as a ‘living’ inheritance to them. Some equity release providers offer an ‘inheritance guarantee’, so that you can ring-fence some of your property wealth to pass on a guaranteed amount. Learn more about the risks of equity release in our article Equity release – what are the risks?
Another potential pitfall is that equity release can impact on your entitlement to means-tested benefits, such as Pension Credit, Universal Credit and Council Tax Reduction, as these are dependent on how much income or savings/capital you have. This doesn’t mean that equity release definitely won’t be right for you, but you should work out the impact it will have on your benefits, and seek advice on this. Find out more in our guide How lump sum payments and savings can affect your benefits.
Depending on the equity release plan you choose to could leave your family potentially owing a large portion of your home’s value to the equity release provider. It could also possibly scupper any plans to move home or downsize in future. That’s because if you’ve released equity from your home and then sell, you’ll probably face charges if you want to use the proceeds to pay back what you owe.
However, you might be able to get ‘downsizing protection’ from your equity release provider, so you can repay the plan in full without paying an early repayment charge. If you’re thinking of downsizing, read our article Five questions to ask yourself if you’re considering downsizing your home. Remember that your plans may change in the future even if you’re not wanting to move now, so it’s important to factor this in when taking out an equity release plan.
Equity release is also unlikely to be the right choice if you’re not comfortable or clear on what the charges will be. Interest charges can build into substantial sums over the decades due to compounding (when interest is calculated each year on the amount released and the interest you’ve already been charged). If you are paying interest at 3%, for example, this would double the amount owed after 24 years, leaving your family potentially owing a large portion of your home’s value to the equity release provider when your property is eventually sold. Find out more in our article Costs of equity release explained.
What are your other options?
If you decide equity release isn’t suitable for you, there may be plenty of other options available if you’re looking to raise some money. For example, you may be able to release equity from your home by remortgaging.
However, you’ll of course have to keep up with regular mortgage payments once you have released equity in this case. Another option may be a retirement interest-only mortgage, which is similar to a standard interest-only mortgage but it’s assumed the loan will only be repaid when you die or sell the house. You can read more about retirement interest-only mortgages in our guide What’s the difference between a lifetime mortgage and a retirement interest-only mortgage?
Other options include downsizing to release a lump sum, taking out a personal loan, if you’re looking to borrow a relatively small amount, or drawing money from your pension. However, before considering any of these alternatives, it’s important to fully understand the implications. Read more in our article Six alternatives to equity release.
Where to get more help
If you’re considering equity release, your first step should be to seek advice from a qualified financial advisor. You can find a local financial advisor on VouchedFor*, the review website for financial advisors, or Unbiased*, which connects users to advisors in their area, or for more information, check out our guides on How to find the right financial advisor for you.
They can help you understand the best option for you and recommend a suitable product from a member of the Equity Release Council (ERC). The council has a number of product standards which help safeguard borrowers so it is important that any provider you choose is a member. Advisors can also be members of the ERC. You can search for an equity release provider that belongs to the ERC here.
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If you’re considering releasing equity from your home, Rest Less members can book a free consultation from Fidelius. Speak with a qualified, FCA-regulated financial adviser you can trust. Rated 4.7/5 on VouchedFor from over 2,600 reviews.
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