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Everything you need to know about equity release and the alternatives

One solution could be equity release if you’re a homeowner entering later life and you’re worried about your financial wellbeing. 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 property in form of money that you can use. You can access this cash as a lump sum, or in smaller quantities, or as a mixture of both.

The funds are usually repaid upon death or if you move into long-term care.

What are the different kinds of equity release?

Lifetime mortgage Here, you obtain a lump sum in the form of a mortgage while keeping possession of your property.

When you pass away or when you move into long-term care, the loan amount together with any built-up interest is eventually repaid from the sale of your property.

The interest is compounded, so the more time you keep the loan, the more interest you’ll pay. That said, some lenders will allow you to make regular repayments to reduce the overall interest you’ll be obligated to repay at the conclusion.

older couple on ipad

To qualify for a lifetime mortgage, you have to be at least 55 years old.

Home reversion With home reversion (which is only offered 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 house, but you’ll have to agree to maintain and insure it.

You can sell the whole property, or retain a percentage of it, perhaps to transfer on to your descendants as an inheritance.

On passing, the home will be sold, with some of the proceeds going to the rest and the company to whoever you left it to.

How much does equity release cost?

Interest rates for equity release used to 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 at the moment, is around 3%.

On top of the interest rate, you’ll have to pay setup fees. These can reach from ₤ 1,500 to ₤ 3,000, depending on the plan chosen.

What are the advantages of equity release?

It gives you cash to spend now rather than having it remain secured away in your home

You still get to live in your home rent-free

You continue to benefit from any rise in the value of your property

You retain ownership of your home if you take a lifetime mortgage.

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 minimizes the value of your property, impacting the amount you can leave an 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 suitable for you will depend on your individual 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 vital that you do not just concentrate on the immediate boost you’ll get from the cash 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 ideal for everyone. Before you go for it, it might be useful to think about the available options. Here are a few worth looking at:

Downsizing: selling your current property, 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 option.

Letting out a room: if you have additional 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.|You can earn up to ₤ 7,500 tax-free annually through the government’s Rent a Room Scheme if you furnish the room before letting it out.

Remortgaging: this can enable you to borrow more than equity release.

Final word.

It might be useful to first seek advice from a financial adviser with an equity release qualification if you’re thinking about equity release. The adviser will help you find the best deal if equity release is appropriate for you.

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Equity Release Guru is a trading style of Responsible Life Limited. Responsible Life Limited is authorised and regulated by the Financial Conduct Authority and is entered on the Financial Services Register \( under reference 610205.

In using this website I give express consent to Equity Release Guru to call me on the number provided from time to time. Calls may be recorded for training and quality purposes.

This is a Lifetime mortgage which may reduce the value of your estate and may affect your entitlement to state benefits. To understand the features and risks ask for a Personalised illustration.

Any information contained herein is a personal opinion of the author and should not be considered to be advice of any kind. Inheritance Tax planning is not regulated by the FCA. Think carefully before securing other debts against your home. By consolidating your debts into a mortgage you may be required to pay more over the entire term than you would with your existing debt.

Only if you choose to proceed and your case completes will Responsible Life Limited charge an advice fee, currently not exceeding £1,295. Our adviser will talk through the setting up costs of a lifetime mortgage before you make any decision to proceed.

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