If you’re a homeowner entering later life and you’re worried about your financial wellbeing, one solution could be equity release. It’s a scheme that allows you to unlock some of the value of your home and access cash that can supplement your pension or retirement income.
Here’s everything you need to know about equity release.
What is equity release?
Equity release refers to a range of financial products that let you access the equity in your home in form of cash that you can use. You can access this money as a lump sump, or in smaller amounts, or as a combination of both.
The money is usually paid back upon death or if you move into long-term care.
What are the different types of equity release?
Lifetime mortgage
Here, you borrow a lump sum in the form of a mortgage while retaining ownership of your home.
The loan amount together with any accrued interest is eventually repaid from the sale of your home when you die or when you move into long-term care.
The interest is compounded, so the longer you hold the loan, the more interest you’ll pay. That said, some lenders will allow you to make regular repayments to reduce the total interest you’ll owe at the end.
To qualify for a lifetime mortgage, you have to be at least 55 years old.
Home reversion
With home reversion (which is only available to those aged 65 and above), you sell your home to a provider for a lump sum payment or regular income.
You’ll have a legal right to continue living in the property, but you’ll have to agree to maintain and insure it.
You can sell the entire property, or retain a percentage of it, perhaps to pass on to your descendants as an inheritance.
On death, the property will be sold, with some of the proceeds going to the company and the rest to whoever you willed it to.
How much does equity release cost?
Interest rates for equity release tend to be higher than for a standard mortgage due to the perceived higher lending risk of this scheme. The typical average rate for a lifetime mortgage, for example, is around 5%.
On top of the interest rate, you’ll have to pay arrangement fees. These can reach £1,500 – £3,000, depending on the plan chosen.
What are the advantages of equity release?
- It gives you money to spend now rather than having it remain locked away in your property
- You still get to live in your home rent free
- You continue to benefit from any rise in the value of your home
- If you take a lifetime mortgage, you retain ownership of your home
- Since equity release is transferable, you can move to an alternative property in the future (subject to meeting suitability criteria set by your equity release company)
What are the disadvantages of equity release?
- It reduces the value of your estate, affecting the amount you can leave behind as inheritance to your beneficiaries
- Having extra income from equity release may reduce or totally eliminate your entitlement to means-tested benefits such as pension credit and universal credit
- With home reversion, the company owns all or part of your home
Is equity release right for me?
Whether equity release is appropriate for you will depend on your personal circumstances including:
- Your age
- Your income
- The amount you want to release
- Your plans for the future
The Money Advice Service advise that when releasing equity from your home, it’s important that you do not just focus on the immediate boost you’ll get from the money you unlock, but also on how it will affect your future choices and financial situation in later life.
What are the alternatives?
Equity release might not be suitable for everyone. So before you go for it, it might be useful to consider the available alternatives. Here are a few worth looking at:
- Downsizing – selling your current home, moving to a smaller one and pocketing the difference.
- Accessing credit – if you only need a small amount, then a personal loan or a credit card with a 0% interest rate might be a much better alternative.
- Letting out a room – if you have extra space in your home, consider renting it out to raise extra income. If you furnish the room before letting it out, you can earn up to £7,500 tax-free annually through the government’s Rent a Room Scheme.
- Remortgaging – this can allow you to borrow more than equity release.
Final word
If you’re considering equity release, it might be useful to first seek advice from a financial adviser with an equity release certification. If equity release is right for you, the adviser will help you find the best deal.
