Many homeowners can find themselves in a financial situation where they are struggling to make ends meet, facing unexpected expenses or simply desiring a more comfortable retirement. If you are in need of access to quick cash and you own your home, then equity release might be a suitable solution.
While equity release is an easy solution to access the cash that is tied to your home, it’s also not a decision to be taken lightly. Depending on the terms of your bank or loan provider, it can be an expensive and risky venture.
Equity release is a big financial commitment, so it is essential that you understand what it would mean for you and your family. Whether you’re considering selling or remortgaging your home or want to release some equity instead, this guide will walk you through the key considerations to determine if this is the best choice for you.
- What is Equity Release
- How does equity release work?
- Eligibility
- Benefits and risks
- Equity release options
- What are life time mortgages?
- Questions to ask yourself before taking out equity release
- Final Advice
What is Equity Release
Equity release is a method to access some of the value (equity) that is tied to a property you own and convert it into cash. There are a number of providers and schemes that let you access – or ‘release’ – a tax-free, cash lump-sum.
Usually, the money you release is made available in one lump sum, several smaller amounts on which interest is payable or a combination of both. If you are 55 or older, and wish to obtain funds against the security of your own home, there is no need for your mortgage to be fully paid off to do this.
How does equity release work?
There are two equity release options. These are:
- Lifetime mortgage: Most people who take out equity release use a lifetime mortgage. It works in the same way as a traditional mortgage although policies and terms vary from lender to lender. You can choose to make repayments or let the interest roll-up. The loan amount and any accrued interest are payable once you move, or after your death or when you move into long-term care. However, letting interest over time can quickly increase the total amount of debt you owe.
- Home reversion: In this case, you sell part of or your entire home to a home reversion provider and in exchange receive a lump sum or regular payments. While you retain the right to continue living in the property until you die without paying rent, you have to maintain and insure it. You can ring-fence a percentage of your property for later use and use it towards your inheritance. The percentage you retain stays the same regardless of the change in property values, unless you decide to take further equity releases. At the end of the plan your property is sold and the sale proceeds are distributed according to the remaining proportions of ownership.
The main difference between the two forms of equity release is that with lifetime mortgages you know the exact rate. With home reversion plans, however, there are fluctuations – for example, if your property value rises significantly, so does the amount it gets.
Eligibility
Whether you are eligible to release equity from your home depends on several factors such as:
- your age (you need to be 55 or over and if you’re married, in a civil partnership, or cohabiting, both you and your loved one need to be 55 or over and own the property jointly).
- your income
- how much money you want to release
- your place of residence
- your current financial situation (are you mortgage-free)
- Equity release may not be right for everybody so you need to carefully look at the individual terms of the lender before you make a decision.
Benefits and risks
Equity release may seem like a tempting way to immediately boost your finances, but you need to look at how it will affect your future choices and financial situation in later life.
Therefore, it’s important to examine the benefits and risks involved in releasing equity.
Benefits
- You continue to own and live in your home regardless of whether you opt for a lifetime mortgage or home reversion.
- You get a cash lump sum or several smaller amounts you can use for your end-of-life care, unexpected expenses or other bills.
- A ‘no negative equity’ guarantee means that neither you nor your estate will ever have to pay back more than your property is sold for.
- An optional inheritance guarantee allows you to leave an inheritance for your family (if this option is selected)
- A voluntary partial repayment feature lets you pay back some of the money you’ve borrowed
- Downsizing protection can help if you want to move and transfer your lifetime mortgage to a new property but it doesn’t meet the lender’s current lending criteria. If you’re eligible, you can repay the lifetime mortgage without an early repayment charge applied to the remainder of the sum.
Risks:
- It can affect your benefits. Having cash rather than a property can affect the benefits you’re entitled to, such as pension credit, universal credit and others.
- If the lender is not on the Financial Conduct Authority register, there is no free-to-use complaints service if you’re unhappy with the service you receive.
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- If you take out an interest roll-up plan, there will be less for you to pass onto your family as an inheritance.
- If you decide to downsize and take your lifetime mortgage with you, you might not have enough equity in your home to do this.
- If you change your mind, there are repayment charges, which could be expensive.
- If you have to pay arrangement fees, they can range between. £1,500-£3,000 in total, depending on the plan
Equity release options
There are several equity release options made available to people aged 55 and older who own their home. The most common are mortgage-based products (lifetime mortgages) secured against your home. These are then repaid from the sale of the property when you die or go into long-term care. You can take out a loan on your property in return for a one-off lump sum or regular smaller sums.
This is popular because not everyone needs a big lump sum at the outset, and because you only have to pay interest on the cash you release.
Lenders are offering other types of deals with flexible terms. Some schemes include a feature called drawdown, where a pot of money is set aside for you to draw from when you need to.
What are lifetime mortgages?
This is the most popular form of equity release Brits over the age of 55.
A lifetime mortgage is a way to borrow some of your home’s value at a fixed or capped interest rate. Some lifetime mortgages pay out a lump sum on which you’re not required to make repayments. However, in this case the interest compounds rapidly as the amount you owe is increasing all the time, unlike a normal mortgage.
There are some ‘drawdown’ versions which allow you to pay back the interest or even pay back some of the capital as well. This lets you reduce the overall cost. With this type, you can take money out of your property in smaller amounts at a time up to an agreed sum and you pay interest only on the amount you take, rather than the whole amount available.
Questions to ask yourself before taking out equity release
Releasing equity from your home is a big decision and it’s important to understand what it means for you.
In some cases, releasing equity can change your tax position and affect your eligibility for welfare benefits (such as council tax support and pension credit). If you are relying on state benefits for your day-to-day expenses, it may not be the best option for you.
You also need to consider how equity release affects your family and their inheritance as well. Although you can safeguard some of your home’s value as inheritance, it will be reduced after the sale of your property and paying off the lifetime mortgage, which is something you may want to consider.
It is best to seek legal advice and speak to a professional financial adviser before taking any steps. An expert can help you determine if equity release is right for you and will consider your overall financial situation and other ways of raising cash available to you. In some cases, downsizing is a more suitable option.
Final Advice
If you have money tied up in your home and you want to fund a more comfortable retirement, equity release offers one way to boost your finances.
However, you need to be mindful of the equity release schemes, providers and advisers you consider and check if they are regulated by the Financial Conduct Authority. Only consider providers that are members of the Equity Release Council and abide by its standards and principles.
This means you can take advantage of their ‘no negative equity guarantee’, which means you will never need to pay back more than the value of your home.
Be sure to also check the ERC register to make sure the person or company you’re dealing with has signed up to this industry body’s code of practice.
Conclusion
Although it represents a serious financial commitment, equity release can be used as a way to top up your pension or other income when you stop working. It provides a relatively fast and simple lie of cash you can use to maintain or enhance your lifestyle in later life.
However, bear in mind that your home is a valuable asset and forms a significant part of your estate. Make sure you speak with a specialist first before you make a decision. Find out exactly what equity release can do for you and weigh the benefits and risks of releasing the hidden cash from your existing home.
