Equity release is a way for homeowners over the age of 55 to cash in on the value of their house. Considering that, for most of us, a home will be the biggest asset we ever own, it makes sense that you might want to unlock its value – whether to pay for care, help family members, or even just enjoy retirement.
“Equity release will always be an expensive but useful option,” says Nicola Crosbie, a chartered financial planner and principal of Moran Wealth Management.
“As people are living longer, they often find themselves running out of money for larger capital expenses. They understandably want to be able to continue to live in their home and it can enable them to do so, enjoying some of its value.”
However, it can also be a very expensive way to access that cash, and will deplete any inheritance you were hoping to pass on to family. It might also be unnecessary when there are other options on the table.
Here, i outlines the way equity release works, and what alternatives you should consider before taking the plunge.
How does equity release work?
There are several different products which come under the equity release umbrella, but they are all intended for people over 55, and they allow you to release money tied up in your home.
Most products can be sorted into two types: lifetime mortgages, and home reversions.
Taking out a lifetime mortgage will mean you borrow some of your home’s value at a fixed or capped interest rate. You then either make monthly repayments, or let the interest “roll-up”. The loan and any accumulated interest is then paid back when the homeowner either dies or moves into care, and the house is sold.
Meanwhile, a home reversion is an agreement to sell part or all of your home. In return, the provider can either give you a lump sum or regular payments. When the house is eventually sold, the proceeds are shared according to the percentages owned by each party.
Why do people use equity release?
There is no obligation to use the money freed up by equity release for a particular purpose. It might be used for home improvements, holiday homes, or helping family members get on the property ladder.
You can usually choose between taking a lump sum or regular payments, so equity release could either fund a large project or pay for ongoing needs.
“Care at home is another example of a common use, or releasing equity towards a better standard of residential care where one person is in care while one person still lives at home,” Ms Crosbie says.
“Another example is where the main asset is the home, but regular income is low, so it is needed more to finance the day to day living expenses.”
What are the downsides to equity release?
The biggest downside to equity release is the cost. Interest rates on lifetime mortgages tend to be above the level of a standard commercial mortgage. And if you are not paying off the interest on a monthly basis, it can grow to a huge amount.
“I would always position equity release as a last resort due to the extra charges incurred and higher interest rates,” Ms Crosbie says. “The impact of rolled up interest can be staggering over an extended period and people need to understand the parameters it can rise to.”
Many lifetime mortgages now allow you to make payments which can slow how fast the debt balloons. You can also change your mind, but you are likely to be subject to expensive early repayment charges.
On top of that, the assumption in most equity release contracts is that the loan will be repaid by selling the house. That means it is not an appropriate tool for anyone wishing to pass on their actual home – and not just its value – to the next generation. Otherwise, your family will only be able to keep the house if they have another means to pay what’s owed.
You should also consider whether the money you receive will impact your ability to receive state benefits.
What are the alternatives to equity release?
Do not assume that, just because you are an older borrower you cannot get a normal mortgage, Ms Crosbie says.
“Some retired households have strong monthly disposable income and could consider a more standard retirement mortgage whereby interest is serviced monthly, or even a lender that lends to a higher age on a Capital and Interest Repayment Mortgage.”
Other options to consider include downsizing to a smaller property, asking family members for help, and applying for grants towards any essential home improvements.
