By the time many people reach retirement, they find themselves equity rich but cash poor. If you’re in this position, you have probably already come across the idea of equity release without fully understanding what it involves.
Essentially, equity release allows homeowners to access money from the value of their home without having to sell it or repay any of the loan during their lifetime. These schemes are one way of securing financial freedom as you get older and, for some people, can be a smart and sensible way to support their lifestyle.
However, it’s always important to research a major financial decision like this properly before making any commitments. Whether you’re looking to access a lump sum or smaller drawdown amounts, let’s take a look at some of the reasons why equity release may – or may not – be the right option for you.
What are the different types of equity release?
There are two main types of equity release schemes; home reversion and a lifetime mortgage.
With a home reversion scheme, you sell part (or all) of your home to the scheme provider, and continue to live in your home, rent-free, while receiving a lump sum or regular payments. The percentage of your remaining ownership remains the same, meaning that it’s possible to ring-fence some of your property’s value to leave as inheritance. At the end of your plan your property is sold and the lender takes their percentage while yours goes to you or your estate.
The other option for equity release is to take out a lifetime mortgage. This is where you borrow money secured against the value of your home – similar to a conventional mortgage. If you have paid off your existing mortgage, the loan is then yours to use as you wish. There are some restrictions on this type of equity release, such as being at least 55 years old. You can look more closely at these restrictions here.
The advantages of equity release
Depending on your situation, equity release can be hugely beneficial. For many, the most valuable aspect is being able to stay in your family home and still have access to the funds to support a comfortable lifestyle or make an investment. Even if your house decreases in value, reputable schemes have a “no negative equity guarantee”, which means that you will never need to pay back more simply because your house isn’t worth what it was.
Plus, there’s a flexibility to equity release. You can choose whether you would prefer a lump sum or to take several smaller payments over a fixed period. There’s also no restriction on what you can spend your money on, either. Pack up your family for a holiday of a lifetime, treat yourself to a property renovation or cover the cost of your grandchildren’s education.
What are the drawbacks to consider?
The main drawback of lifetime mortgages is that the interest rates are usually higher than standard mortgages, meaning that the total cost can “roll up” to a very significant amount over a number of years.
With a home reversion scheme, you’re unlikely to achieve the true market value of your property as the scheme provider will be waiting many years to see any return on investment.
Both schemes will affect the amount of inheritance your family members receive when you pass away, and it’s important to remember that equity release might impact any benefits that you may have previously been eligible for once you reach pension age.
What are the alternatives to equity release?
Before settling on an equity release scheme as your preferred option, do have a think about other ways in which you can access money. For example, an unsecured personal loan can provide an injection of cash and work out to be more cost-effective.
There are also ways of accessing money using your house. For example, you may also want to look into a mortgage extension, particularly if you are under the age of 65. Moving to a smaller, cheaper home is another option (often referred to as ‘downsizing’) and, although it may require considerable effort, could provide you with better returns while letting you live in a more manageable home.