What is an Equity Release, and should I consider one?

Equity Release a way for homeowners over the age of 55 to unlock some of the money (the equity) that is within the value of your home. You don’t need to have fully paid off your mortgage to do this, but you will need to repay any existing mortgage from the money released.

As a rule, you can take the money you release in one lump sum, or in several smaller amounts.

The amount released is yours to spend on what you want. Common uses would include, repaying the remaining amount of a traditional mortgage, home improvements, repaying debts, helping children on to the property ladder, a once in a lifetime holiday or just to provide money to top up income.

How does Equity Release work

In simple terms, you borrow money against the security of your property. Normally interest is added to the loan and is repaid when the property is sold. Generally, on death or if you move into Long Term Care.

Equity Release comes in two forms, lifetime mortgages and home reversion plans

A lifetime mortgage is the most common type of equity release plan, there are typically no monthly repayments to make. Your equity release plan is only repaid through the sale of your property when you die or move into long-term care. Here you borrow some of your home’s value, at an interest cost which is added to the loan. This may be at a fixed, capped or variable interest rate.

Whereas, with a Home Reversion plan a provider pays you a tax-free lump sum for a portion of your home value. You can then live in the property (rent-free) until you die. When it’s sold, the proceeds are split based on the percentage you own and the lender owns. So, if your property value rises significantly in value your beneficiaries will only receive a fixed percentage.

Therefore, with lifetime mortgages you know the amount owed with interest, generally home reversion plans are better if property prices stay flatter, worse if they rise substantially.

What are the advantages and disadvantages of Equity Release?

Advantages

  • Financial options

No one tells you what you can or cannot do with your money. Whether you want that new kitchen or holiday you’ve always dreamed of, or want to help your children buy their first home, it’s up to you how you spend your cash. Your money is tax-free and what’s more, you can take your money as a single lump sum, in several smaller chunks as regular income giving you more flexibility.

  • Flexibility

One of the most popular reasons people choose an equity release plan is because they are so flexible. For example, if you take out a lifetime mortgage, what you use your money for is entirely your decision.

It’s also possible to release your money as and when you need it via a drawdown scheme, rather than in one lump sum.

Moreover, you can reduce the amount of interest accrued in the long term by releasing less equity, less frequently or, if your income allows, you can make regular or one-off capital repayments.

  • No negative equity guarantee

All the equity release schemes we recommend come with no negative equity guarantees.

What does this mean? If, at the time that your plan is repaid, your house is worth less than the amount you owe, your loved ones won’t be expected to repay the difference to the lender – and so they will never be out of pocket.

Disadvantages

  • ‘Roll up’ interest

Lifetime mortgages allow homeowners to borrow money against the value of their property at a fixed rate of interest. Because many people choose not to make any interest repayments over the life of their plan, this means that the interest is ‘rolled up’ and added to the final repayment when the plan ends. The longer the term of the plan, the greater the amount of interest that will have to be repaid.

As previously mentioned, the amount of interest to be repaid can be kept to a minimum by either withdrawing equity in smaller chunks over time (what’s known as drawdown) or by making regular or one-off capital repayments: or both!

With Equity Release Supermarket, you can be sure that your local adviser will make sure that you are aware of all the potential pitfalls of equity release. If it isn’t right for you and you have other financial options to achieve your goals, we’ll tell you so.

  • Early repayments charges

Lifetime mortgages are so-called for one very good reason – they are not designed to be repaid during your lifetime.

Consequently, plans can potentially have hefty early repayment charges if you want to repay it early. That said, many recent plans come with fixed-term early repayment charges, which means that a few years in, you have the option to repay without significant penalties

  • Reduced inheritance

Because equity release reduces the value of your estate, it will mean a reduced inheritance for loved ones. That said, it is possible to safeguard a proportion of your property with a guaranteed inheritance plan. If this is important to you, make sure you talk this through and any inheritance tax implications with your Equity Release adviser.

Equity Release – what are my options if I’m under 55?

These types of loan are not available under age 55, so you would need to explore a traditional mortgage/re-mortgage to potentially release any equity.

What are the costs in taking out an Equity Release Plan

For the lifetime mortgage equity release the rates start at under 3%. This is cheaper than rates have been for a number of years – yet still higher than those for most standard mortgages. (As the lender is committed to lend you the money for your lifetime, so they do not know when they will get it back.)

Generally, the lower the amount you borrow as a percentage of the value of the property, the lower the rate will be.

As well as the actual cost of the interest, you’ll have to pay arrangement fees. These can typically tally £1,500-£3,000 in total, depending on the type of plan being arranged. This would include such costs as solicitor & application fees, along with any surveyor fees.

Equity release tips

If you’ve read the above and you’re sure equity release is right for you, here are a few tips:

1. Don’t borrow the full amount you need in one go. The sooner you borrow, the more expensive it is, as the interest has longer to compound. So, borrow as little as you need now, and wait as long as you can to do it again. 

For example, if you think you may need £40,000 from your home to cover 20 years, only take what you need now and wait to take more until needed. Drawdown lifetime mortgages are set up to make this easier.

2. Wondering whether equity release is a good idea? It certainly isn’t something to be taken on lightly, so before you dive right in, first evaluate whether downsizing your property could be an option. If you can sell up and move on to a smaller home, and live off the excess cash you have made, great. You may also find a property more suitable as you age – fewer stairs, perhaps.

3. If downsizing is right for you, don’t put it off. You can always take out an Equity Release loan on the new property if needed.

4. Get advice before you do it. 

5. It can affect your benefits. Having cash rather than a property can affect the benefits you’re entitled to, for example pension credit, universal credit and others. So, if you’re entitled to those, check the impact first.

Mark Chapman
Latest posts by Mark Chapman (see all)

Mark Chapman

Mark has over 30 years experience as a financial adviser. He offers independent financial advice to individuals and corporate businesses; whilst providing a friendly, efficient and professional service. Services include investments, pensions, retirement options, protections contracts and mortgages.