Equity release allows you to draw on the value of your home without having to sell it or move out, helping you to raise funds for your retirement. Increasingly, those aged 55 and over are opting to release equity in their homes in order to enjoy a higher standard of living.
Home equity release is a way for you to access cash or a regular income based on the value of your home. As you begin to make plans for your future and that of your family, equity release provides the chance for you to pass on a tax-free legacy to your loved ones, offer children help getting on the housing ladder, or simply the chance to enjoy a higher standard of living in your retirement.
In this piece, we explain the process involved to help you decide whether it is the right choice for you.
Equity release in a nutshell
Equity release is a financial product like a mortgage, personal loan or savings account. However, equity release products are available only to homeowners in higher age brackets who are making plans for their future. There are two basic types of equity release plan:
Type 1: The lifetime mortgage
Lifetime mortgages are a type of loan secured on the value of your home. With this plan, you will receive a tax-free lump sum. There are no monthly repayments. Instead, interest on the loan gathers and, when you die, the loan plus interest is paid using money made from the sale of your home.
Type 2: Home reversion plan
There are also equity release reversion plans. With these products, you sell all or part of your home for a tax-free lump sum or regular payments. You also receive a guaranteed lifetime lease of the property and there are no monthly payments to make. This means you’re allowed to live in your home rent-free despite the lender owning all or part of it, however you must insure and maintain the property. After your death, the lender sells the property in order to recoup the share it owns.
What are the requirements?
You must be a homeowner aged between 55 and 95 to qualify for equity release.
How much can I borrow?
It is important you only ever consider borrowing what you really need and be aware that it could also reduce how much you could earn from means-tested benefits. Most providers of equity release plans guarantee that your debt will never be greater than the value of your home, so the amount available to borrow is strictly limited.
An average borrower would be able to release only up to 35% of their property value, so if your house is worth £250,000 you would be able to borrow around £80,000.
How much does a loan cost?
Interest rates are fixed for the term of the equity release plan at around 6%, but you should be aware of the effect of compound interest, which can cause debt to mount significantly.
If you borrowed £50,000 at 6% you would accrue £3,000 interest in the first year. In the second year you would then pay 6% interest on £50,000 plus the first year’s interest of £3,000, increasing your debt to £56,180.
When do I have to pay back the home equity release loan?
As there are no monthly payments to make with equity release products, any debt owed would be repaid when you die using money from the sale of your home. To reduce the interest due over the term, you could choose to make regular monthly payments, paying off the interest as you go, or opt to withdraw the money in stages rather than in one lump sum.
Check the terms should you become unable to live at home and need to move into a care home, as some equity release plans may make you repay the loan in full at this point.
If you are approaching retirement and looking to free the cash tied up in your home, equity release plans may be the right choice for you. However, it is important to seek professional advice from an independent financial adviser before considering releasing equity from your home.
Are there any downsides?
While many retired people choose to release the equity from their homes, without proper preparation there can be some potentially negative consequences.
For example, any equity release plan will ultimately reduce the overall value of your property, and accessing the property’s cash value could potentially impact the state benefits you’re entitled to.
If you’re in the correct age bracket and you’d like to spend the cash that’s tied up in your property, equity release could be right for you. However, it’s vital that you get professional advice from an independent financial adviser before embarking on this journey.
What else do I need to know?
There is an organisation called the Equity Release Council. This body has created a Code of Conduct to protect people who decided to release equity from their homes. You may prefer to select an ERC-approved lender if you do decide to consider an equity release.
You can find more information about home equity release and other personal loans on our Know How blog.