Updated 03 September 2020
As you enter later life, you may find you need additional sources of income. One solution may be to release some money from the value from your home, while continuing to live there. This is known as equity release. This is a major decision, so should never be taken without independent professional advice. Here's our guide on the pros and cons, risks and pitfalls, to help you answer the vital questions, is equity release a good idea or even safe? And where can I find unbiased equity release advice that I can trust?
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 your existing mortgage (and so own your home outright) 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. It can be particularly useful for covering large expenses later in life, such as long-term care. 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 achieved either 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.
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 per cent and 50 per cent 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 the property. However, this could still mean that all the property’s value is used up in 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 state of health is also taken into account – being in poor health usually means getting a larger share of the value of your home.
It is possible to cut out the middle-man 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 UK’s long rise in house prices means that a large proportion of homeowners’ wealth is sunk into their property, and is therefore inaccessible. If your home has increased in value over the years, equity release enables you to get at some of that money to supplement your retirement income – instead of leaving it all to your beneficiaries, or to cover your 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 – although of course 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 the time comes for the home to be sold – up to the total value of the property (but not more than that).
This is because a lifetime mortgage (like 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 per cent interest, the amount you owe would double every 15 years. This is a good reason to be cautious of lifetime mortgages if you hope to leave a good inheritance for your family.
One way to reduce this risk is to pay off the 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. Yet another is that having lots of money in your 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 – but cash in the bank certainly will be.
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, go over all your future plans with your adviser at the start, 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 your equity release company so that 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 per cent of the market value of your home, and often much less (as little as 30 per cent). 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 make sure that your home reversion contract allows you to move home, if necessary, and that there are no elements of the contract that could cause you unwanted problems or expenses further down the line. Ask both a financial adviser and a solicitor to study the contract for you to ensure that 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.
The Equity Release Council was set up to protect people from losing out from these schemes. Any equity release company that has the Equity Release Council logo on their material must ensure you can still live in your home until you die or move into permanent care. They must also ensure that 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 the documents before signing up to a scheme.
Whether equity release is right for you or not will depend on your circumstances. Some reasons to consider it include:
Some reasons to choose an alternative to equity release include:
The minimum age for taking out a lifetime mortgage is usually 55. The minimum age for a home reversion scheme may be 60 or 65.
Your financial adviser or mortgage adviser can help you decide whether an equity release scheme is appropriate, or whether you should consider other options such as downsizing instead. Your adviser can also find the best one for you from the whole of the market and set it up for you. As an extra safeguard, have your solicitor check over the agreement you have with the equity release company before signing it.
There are numerous up-front costs involved in setting up an equity release scheme, so make sure you’re clear on all of these before you proceed. Costs can include:
These costs can vary, but you should allow for around £3,000.
1. Take advice first
Consult an independent financial adviser or mortgage broker specialising in equity release. They can give you unbiased advice on whether it really 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 Equity Release Council, so you are protected from pitfalls 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 a wide range of circumstances, such as how much you hope to leave your family as an inheritance. Your adviser can help you with this choice.
4. Borrow in stages
If you are using a lifetime mortgage, it can be more cost-effective to take out a series of smaller loans rather than one big loan, as then you will pay less interest over time. You could also consider paying off the 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 were to use equity release. The loss of benefits may make equity release poor value for you. Again, your 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 your available options will you know that equity release is the best one for your circumstances.
Many of the mortgage advisers and financial advisers listed with Unbiased offer high quality independent equity release advice. Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
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