Equity release is not a decision to take rashly.
That said, it can be a powerful way to unlock a significant set of cash if you really need it.
In brief, equity release is the process of taking some of the equity in your property and converting it into cash. You can take the full amount in one lump sum, or in lots of separate payments (which involve paying interest), or a mix of these two approaches.
You do not need to have completely paid off your mortgage to engage in equity release, but you do need to be over the age of 55 (or, in some cases, over 60).
Who/What is Equity Release for?
Equity release is designed for homeowners. Generally speaking, the older you are the more you can borrow as a proportion of your property value.
Freeing up some of the capital in your property can achieve a number of goals. However, there are important downsides of equity release that you should always consider first with an independent financial adviser prior to going through with any decision.
Broadly, these are some of the ways that cash from equity release can be used:
- Paying for a big holiday.
- Home improvements.
- Giving a family gift, such as a deposit for a home.
- To reduce an inheritance tax bill (IHT).
- To provide additional income for day-to-day living.
- To pay off debts.
Alternatives to Equity Release
You should never simply plunge into equity release. It is important to consider other routes open to you as well with the help of a financial adviser or planner.
One important alternative to equity release is downsizing. Here, you sell your home and move into a smaller one. You can then use the money you made from the sale for one or more of the purposes listed above.
Downsizing can be a great option for some people and a terrible idea for others. So it’s important that you carefully weigh the pros and cons first. For instance, moving into a smaller home could make sense for people who can no longer manage stairs or the scale of the housework in a bigger property.
On the other hand, it might not be possible to downsize and remain in the local area. If you have a strong community, set of friends and family nearby, then be careful not to gloss over the relational, emotional and psychological impact of moving away.
Other options to downsizing include taking in a lodger, looking at potential state benefits you may be entitled to, using alternative assets and re-budgeting. Again, consider each course of action carefully with a qualified, experienced financial adviser to make sure you make the most informed decision available to you.
How Equity Release Works
Broadly speaking, there are two ways to engage in equity release.
The first route is to take out a mortgage which is secured against your residential property. This is the most common form of equity release. Here, you continue to own your home and live in it, but you pay back what you owe when you die or move into long-term care.
Under this “lifetime mortgage” route, you can either make repayments to the mortgage or simply let the interest build up. It’s worth bearing in mind that this generally means that you will have less to pass on to your beneficiaries as an inheritance. However, you can opt to ring-fence a part of your property’s value in order to pass this on as an inheritance.
The second route is generally known as “Home reversion”. This is where you sell your home (or part of it) in exchange for regular payments or a cash lump sum. However, you can choose to keep living in the property until your death. You are exempt from rent, but you will need to take out insurance on the property and continue to maintain it.
Again, you can ring-fence a portion of your property value for an inheritance, if you so choose. When you die, the property will be sold and the proceeds distributed accordingly.
An Example of Equity Release
Martha is 80 years old and lives in a house worth about £400,000. She does not want to move. However, she would like to travel the world on a cruise, and then make some improvements to her home afterwards.
She has no savings but has a personal pension and her state pension, which allow her to live comfortably. Equity release could make sense for Martha, as it would free up the cash she needs for her two goals whilst continuing to live in her home.
Tips on Equity Release
If you do eventually decide (upon advice from your financial adviser) that equity release could be a good option for you, here are some things to consider before making any decisions:
- Make sure the company you choose is a member of the Equity Release Council. This ensures that the deal you get includes a “no negative equity” guarantee. This means that if your home loses value, then your estate will not accrue debt from the deal.
- Check how the cash from any potential equity release might affect your state benefit entitlements. In particular, having your assets tied up in cash rather than property can affect your access to universal credit and pension credit.
- Consider not borrowing the full amount all at once. Bear in mind that the earlier you borrow money against your property, the longer you will build up interest.