As you enter later life, you may need extra sources of income. A potential solution is equity release, but you may wonder what is it, and how does it work? Is equity release a good idea?
Equity release allows you to access some money from the value of your home while continuing to live there.
This is a major decision, so it should never be taken without independent professional advice.
Here's our guide on 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?
Equity release guide contents:
- What is equity release?
- How does equity release work?
- What are the benefits of equity release?
- What are the risks and pitfalls of equity release?
- Am I protected when using equity release?
- Is equity release a good idea?
- Could you lose your home?
- When can I use equity release?
- How do I set up equity release?
- Six equity release tips
- How to find equity release advice
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 a large portion of this money.
If you have paid off most or all of your existing mortgage, you can consider an equity release scheme.
Equity release can provide you with a large sum of money to spend while enabling you to continue living in your home.
However, there are downsides to accessing the value of your home in this way.
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 type of 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 popular types of equity release are:
This is the most popular type of equity release.
You borrow a lump sum 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 18% and 50% of the property’s total value – typically the older you are, the more you can release.
The amount you owe will grow with interest, but you can sometimes reduce this by paying off the interest as you go, so it doesn’t compound (this is known as an ‘interest paying mortgage’).
If you choose not to pay off the interest as you go, you will have an ‘interest roll-up mortgage’.
In this case, you will end up repaying more overall, as the interest will compound over time.
Most providers now offer a ‘no-negative-equity guarantee’, which means the debt will never be more than the sale value of your property.
However, this could still mean that all the property’s value is used up when paying off the mortgage.
You may qualify for an enhanced lifetime mortgage if you have a serious health condition or an unhealthy habit, like smoking. This can enable you to borrow more or to pay lower interest.
With a home reversion scheme, you sell all or part of your property, but with a legal right to continue living in it 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.
Some providers of home reversion schemes require you to be over 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 as being in poor health usually means getting a larger share of the value of your home.
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.
This may sometimes offer better value, but isn’t easy and requires in-depth legal and financial advice.
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 lengthy 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, instead of leaving it all to your beneficiaries or to cover long-term care costs.
The main disadvantage of equity release is that it does not pay you the full market value for your home.
You will receive far less money than you would from selling the property on the open market, but, in that situation, you would still have to find somewhere else to live.
Another downside of equity release is that it will reduce the amount of inheritance your beneficiaries could otherwise receive.
The specific risks vary with the type of scheme you choose.
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 not more than that).
This is because a lifetime mortgage, similar to a regular mortgage) charges compound interest.
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, than in a cash bank account.
However, 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 are living there, while any cash in the bank will be.
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 any future plans with an adviser, so you’re less likely to change your mind.
If you want to move home, you can keep your scheme running as normal. You’ll have to tell the equity release company so they can decide if your new home is similar in value.
The main disadvantage of a home reversion scheme is that you will only receive (usually) a maximum of 60% of the market value of your home, and often much less (as little as 30%).
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, have your independent financial adviser or mortgage broker 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.
Continue reading below for more tips and advice to avoid any prospective equity release horror stories.
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 also have the right to ask a solicitor to check all documents before signing up for a scheme.
Whether equity release is right for you or not will depend on your circumstances.
Some reasons to consider it include:
Your other savings and/or sources of income is not enough to meet your retirement needs.
You don’t want to (or can’t) downsize.
You don’t mind reducing your family’s inheritance (or you have no beneficiaries).
An independent financial adviser has told you this option is best for you.
Some reasons to choose an alternative to equity release include:
You can meet your income needs in retirement from other sources.
You have the opportunity to release money from your home by downsizing.
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 not the best one for you.
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 a good condition or renting it out, this would likely breach the contract, but 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.
The minimum age for taking out a lifetime mortgage is usually 55, while he minimum age for a home reversion scheme is usually 60 or 65.
A financial adviser or mortgage broker can help you decide whether an equity release scheme is appropriateâ¯or whether you should consider other options, such as downsizing instead.
They can also find the best choice for you from the whole of the market and set it up.
As an extra safeguard, have a solicitor check over your agreement with the equity release company before signing it.
There are numerous upfront costs involved in setting up an equity release scheme, so make sure you understand these before you proceed.
Costs can include:
A mortgage arrangement fee
A completion fee (when the scheme ends)
These costs can vary, but you should budget for around £3,000.
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, such as how much you hope to leave your family as an inheritance. 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.
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).
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