Is equity release a good idea and is it safe? The pros and cons
When you hit retirement, you may find you need some additional income. One option could be equity release, but what is it, how does it work and is it a good idea and safe to do?
Quick answer
Is equity release a good idea?
Equity release can be a good idea if your other savings and income won’t meet your retirement needs, you can’t or don’t want to downsize, and you’re happy to reduce your family’s inheritance. If not, an alternative may suit you better. An independent financial adviser can help you decide.
Equity release allows you to access some money from the value of your home while continuing to live there.
This is a major financial decision, with implications not only for you but your beneficiaries, so it should never be taken without independent professional advice.
Here's our guide to how equity release works and the pros and cons, to help you answer vital questions.
Want to skip the guide and get an equity release adviser to walk you through the best options for your situation? Find the right financial adviser fast here.
Equity release lets you access some of the money that is built up in your home.
Lifetime mortgages and home reversion schemes are the two main types of equity release available.
Releasing equity from your property comes at a cost and will reduce the inheritance you are able to pass on to your loved ones
Choose a lender that is a member of the Equity Release Council (ERC) and fully explore alternatives like downsizing first.
What is equity release?
Your equity is the total market value of your home, minus any mortgage you haven’t yet paid off.
In short, it’s the sum you’d walk away with if you sold the home for cash.
But if you don’t want to sell your home, you may still be able to access some of this money.
If you have paid off most or all of your existing mortgage, you can consider an equity release scheme.
This can provide you with cash to cover larger expenses you may face in later in life, such as long-term care or home improvements. Or you can use it to supplement your income and help you make the most of your retirement.
In fact, it’s up to you what you do with the money.
However, there are downsides to accessing the value of your home in this way.
How does equity release work?
An equity release provider will provide you with either a lump sum or an income in exchange for part of the value of your home.
This is done by using a specialist mortgage, or by selling that portion of your home on the condition that you can continue to live there as long as you wish.
Read on to find out more about these different types of equity release.
What are the different types of equity release?
The two types of equity release are:
What is a lifetime mortgage?
This is the most popular type of equity release.
You borrow money in the form of a mortgage, which is eventually repaid from the sale of your home either when you die or move into long-term care.
The amount you can borrow is usually between 20% and 60% of the property’s total value – as a guide, the older you are, the more you can release.
Find out how much equity you could release using our free equity release calculator below:
Just like a regular mortgage, interest will be charged on the loan. This normally rolls up until the mortgage is repaid - meaning the longer the arrangement lasts, the more interest you will pay overall.
However, if you have the income available, you may be able to make interest payments as you go. This reduces the impact of compounding and means you pay less interest on the loan.
Most providers now offer a ‘no-negative-equity guarantee,’ which means the debt will never be greater than the sale value of your property.
However, you may still be left with nothing to leave as an inheritance once the mortgage has been repaid.
If you have a medical condition or an unhealthy lifestyle you may be able to benefit from an enhanced equity release plan. This may let you borrow more or access a lower interest rate, depending on your state of health.
What is home reversion?
With a home reversion scheme, you sell all or part of your property, but you maintain a legal right to live there until you die, or move into long-term care.
The money can be paid to you either as a lump sum or as a regular income, whichever you prefer.
Whether you sell all or only part of your home, you won’t receive full market value for it, so bear this in mind when making your decision.
The minimum age to qualify for a home reversion plan is typically at least 60. Generally, the older you are when you take out the scheme, the more money you’ll get.
Your health is also taken into account, if you’re in poor health you may get a larger share of the value of your home.
Home reversion schemes are much less popular than lifetime mortgages and there are now limited active players in the market.
Are there any other forms of equity release?
It is possible to cut out the middleman and set up your own equity release arrangement.
A few enterprising individuals have tried their own version of the French viager system, by selling their home privately at a discount in exchange for lifelong tenancy rights and a regular income.
Whether or not this approach works for you, ultimately depends on how long you live and it would be essential to get in-depth legal and financial advice first.
What are the benefits of equity release?
The obvious advantage of equity release is that it gives you money to spend now, rather than leaving it locked away in your home.
The rise in UK house prices means that a large proportion of homeowners’ wealth is in their property, and inaccessible.
If your home has increased in value over the years, equity release allows you to access some of that money to supplement your retirement income, or to cover long term care costs instead of leaving it all to loved ones.
What are the risks and pitfalls of equity release?
The main disadvantage of equity release is that it comes at a price.
If you take out a lifetime mortgage, you’ll pay interest on the loan.
If you use a home reversion scheme, you won’t get the full market value on the portion of your home that you sell.
The cheapest way to get equity out of your home is to sell the property on the open market and downsize to a more affordable property.
The specific risks vary with the type of scheme you choose.
However you unlock the equity in your home, you’ll also be reducing the amount you are able to leave to loved ones. But, just how important this is to you, will depend on your family circumstances.
The risks of a lifetime mortgage
With a lifetime mortgage, you run the risk of owing far more than you borrowed when you sell your home – up to the total value of the property (but usually not more than that).
This is because a lifetime mortgage, charges interest that compounds over time.
If you don’t pay off the interest at regular intervals, the entire sum will compound, so at around 5% interest, the amount you owe would double around every 15 years.
This is a good reason to be wary of lifetime mortgages if you hope to leave a decent inheritance for your family.
One way to reduce this risk is to pay off interest as you go. Another option is to take out a series of smaller lifetime mortgages over the years.
This way, you will not be paying interest on the whole sum for the whole period of time, so the amount you end up owing will be less.
Another good reason to do this is that your money is better off invested in your home, where it is likely to grow, rather than in a cash bank account.
Having lots of money in a bank account may reduce the benefits you are entitled to, including help with the cost of care.
The value of your home is not included in any means test as long as you or your partner are living there, while any cash in the bank will be.
If you move out of your home and into a care home, your home may be included as part of a means test for any care home fees.
Can I end a lifetime mortgage early?
You can choose to end your lifetime mortgage early, but this can cost you.
If you’ve simply changed your mind, it’s important to speak to a financial adviser as soon as possible to work out the most cost-effective way of organising your finances.
Even better, discuss concerns with an adviser before you apply, so you’re less likely to change your mind.
Can I move home?
Most providers will let you move home, even once you have taken out a lifetime mortgage - they’ll just move the debt over to the new property.
However, it’s important to take advice first, as your new property will need to meet certain criteria.
What are the risks of a home reversion scheme?
The main disadvantage of a home reversion scheme is that the lender will not pay the full market price for its stake in your home.
The home will also have to be vacated very quickly after your death, often within a month.
This can be a large additional stress on your family, having to sort through your things and clear out the property in addition to arranging your funeral.
You also need to ensure that your home reversion contract allows you to move home, if necessary, and there are no clauses that could cause problems or expenses in the future.
It’s worth asking a financial adviser and a solicitor to study the contract to ensure it is in your best interests.
With any form of equity release, your independent financial adviser or mortgage broker should explain the risks to you in detail, including how much it could cost your family in the long term, and whether downsizing might be a better option.
Am I protected when using equity release?
The Equity Release Council (ERC) was set up to protect people from losing out on these schemes.
Any equity release company that features the ERC logo must ensure you can still live in your home until you die or move into permanent care.
They must also ensure you will never owe them more than the total sale price of your home, even if its value drops - you might hear this referred to a no negative equity guarantee.
Once a financial adviser has recommended an equity release product, you will also need to discuss the arrangement with a solicitor. In addition to conducting the necessary conveyancing work, they will also ensure you are aware of the risks associated with the plan.
Is equity release a good idea for me?
Whether equity release is right for you or not will depend on your circumstances.
Some reasons to consider it or choose an alternative option are included in the table below:
Why equity release could be right for you | Reasons to choose an alternative |
|---|---|
Your other savings and/or sources of income are not enough to meet your retirement needs. | You can meet your income needs in retirement from other sources. |
You don’t want to (or can’t) downsize. | You have the opportunity to release money from your home by downsizing. |
You don’t mind reducing your family’s inheritance (or you have no beneficiaries). | You want to preserve as much of your estate as possible for your family to inherit. |
An independent financial adviser has told you this option is best for you. | An independent financial adviser has told you this option is not the best one for you. |
Could you lose your home with an equity release plan?
If you’re considering equity release, make sure you use an ERC member.
The ERC has a ‘no negative equity guarantee’ so the amount you borrow against the value of your home, plus any rolled up interest, will never go above the value of your home when it is sold.
According to the ERC, it’s rare for a lender to take possession of a property under an equity release plan.
However, if you fail to meet the terms and conditions of your equity release agreement, like keeping the property in good condition or renting it out, this will likely breach the contract.
Nevertheless, the borrower is given the chance to make things right before repossession is an option.
You’ll also have a lifetime lease so you’re guaranteed the right to stay in your home until you either move into long-term care or pass away.
When can I use equity release?
The minimum age for taking out a lifetime mortgage is usually 55, while the minimum age for a home reversion scheme is usually 60.
How do I set up equity release?
A financial adviser or mortgage broker can help you decide whether an equity release scheme is appropriate or whether you should consider other options, such as downsizing instead.
Downsizing and buying a cheaper property can free up significant cash, especially if you own your home outright.
Learn more: Equity release or downsizing: Which one is right for me?
They can also find the best choice for you from the whole of the market and set it up.
A solicitor should also check over your agreement with the equity release company before you sign it.
What does it cost to set up equity release?
There are a number of upfront costs involved in setting up an equity release scheme, so make sure you understand these before you proceed.
Costs can include:
Valuation fees
Legal fees
A mortgage arrangement fee
A completion fee (when the scheme ends)
These costs can vary, but you should budget for around £3,000.
6 useful equity release tips
1. Take advice first
Consult an independent financial adviser or mortgage broker that specialises in equity release.
They can give you advice on whether it is the best option for you, and find you the best deal if so.
2. Use an accredited provider
Make sure the provider you use belongs to the ERC, so you are protected from risks like negative equity.
3. Choose the right form of equity release for you and your family
Whether a lifetime mortgage or a home reversion scheme is best for you will depend on many circumstances. An adviser can offer vital advice.
4. Borrow in stages
If you are using a lifetime mortgage, it may be more cost-effective to get a series of smaller loans rather than a big one, as you pay less interest over time.
You could also consider paying off interest as you go, so it doesn't compound.
5. Check your benefits situation
If you are receiving any benefits in addition to the state pension, check how these might be affected if you use equity release.
The loss of benefits may make equity release poor value for you. Again, an adviser can help you work this out.
6. Consider alternatives
Look at alternative sources of income, such as downsizing or renting out a room. Only by considering all options will you know that equity release is the best one for your circumstances.
How to find equity release advice
All mortgage brokers and financial advisers listed with Unbiased offer high-quality independent advice.
Choosing an independent adviser means they won’t recommend a scheme unless it is in your best interests.
Their advice is regulated by the Financial Conduct Authority (FCA).
Get expert equity release advice
Equity release can enable you to access funds from your property while continuing to live in it and offers some financial flexibility in your retirement.
That being said, it’s crucial to understand the implications of the different equity release options, including how they might affect your estate and overall financial situation.
Carefully consider the benefits and potential drawbacks, such as the impact on inheritance and repayment terms.
By evaluating your choices and how they fit your long-term goals, you can make a well-informed decision supporting your financial wellbeing and future plans.
Unbiased will quickly match you with a qualified financial adviser or mortgage broker for tailored guidance on the most suitable equity release options for your unique circumstances.
Did you find this article helpful? You might also find our articles on renting vs buying and shared equity informative, too.
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