Equity release is one way of accessing the wealth tied up in your property. It has become a much more mainstream way to boost income and manage debts during retirement, without the need for selling your home and downsizing.
In this article, I’ll be looking at what equity release is in more detail, the different types of equity release and the alternatives. Be aware that equity release isn’t the right solution for everyone and you should therefore think carefully before you commit. To help you decide if equity release is the best option for your circumstances you should always consult with an Independent Financial Adviser (IFA) for advice.
What is equity release?
Equity release is a way to access cash from property. Homeowners who are over 55 and own their homes outright or have relatively small mortgages can borrow money or sell part of their home whilst still living in the property. The loan (or reversion sum) is repaid at a future date when the property is sold.
What are the different types of equity release?
There are two main types of equity release schemes, lifetime mortgages and home reversion schemes, so how do you know which type of equity release scheme to choose? Let’s take a look at each.
- Lifetime mortgage: this is a loan secured on your home which doesn’t require repayment until you die or go into long-term care at which point your property is sold to repay the loan. There are two types of lifetime mortgage – interest roll-up and interest-paying.
With an interest roll-up lifetime mortgage, any interest charged is added to the loan. With interest-paying lifetime mortgages monthly or ad-hoc payments reduce the impact of interest roll-up. For more information on how a lifetime mortgage works, see here.
- Home reversion plan: with this type of equity release, the provider buys part (or all) of your property, while you retain the right to live there rent free. When you die or go into care the property is sold and the sale proceeds are shared according to the percentage ownership between you and the home reversion plan provider. This isn’t a loan. It is a partial sale of your home. For more information on home reversion plans, see here.
What do people use equity release for?
There many different reasons and circumstances that lead people to consider equity release. According to the Equity Release Council, paying for home renovation is still the most common reason people extract cash from their property through equity release. Lenders, on the other hand, say equity release is more frequently being used to release cash to help children get on to the property ladder.
Debt is another major issue for retired people and many are using equity release as a way to clear credit cards, loans and pay off mortgages to reduce outgoings.
In addition, people use equity release to access money to gift, for big life events, such as weddings, and for university or school fees for their children.
Is equity release right for me?
One of the most valuable aspects of equity release schemes for many people is that they can get a cash lump sum from their property while still being able to live in their family home. Whether or not equity release is the best option for you will depend on your specific circumstances. Let’s take a look at the advantages and disadvantages of equity release.
- Stay in your own home
- Schemes with a no-negative-equity guarantee mean that regardless of house price changes, you can’t go into negative equity
- Cash can be taken as a lump sum or paid as a regular income
- You can use the cash to spend in virtually any way you wish
- With home reversion plans you are unlikely to receive a true market value on your home, which means a return on investment could take many years
- Interest rates with lifetime mortgages tend to be higher than for standard mortgages, so interest can add up to a very significant amount
For more information on whether or not you should consider equity release, see advice from Money Saving Expert Martin Lewis here.
What are the alternative options?
There are lots of alternative options to equity release that are worth considering. For example, if you simply want to take out a sum of money, it could be cheaper to do it through a standard unsecured personal loan. It may also be possible to get an extension on your existing mortgage, although few lenders will allow you to re-mortgage if you are over the age of 65.
Downsizing is a popular alternative to equity release, which enables you to release capital and still fully own the property you move into. The obvious is to move into a smaller, cheaper property, but moving into a area where equivalent house prices are lower is also an option if a smaller property isn’t appropriate. Downsizing is a very viable alternative to get a substantial cash injection.