If you’re approaching retirement and at least part-own your home, it could be your biggest asset.
Equity release can help you unlock some of the cash tied up in your home, without you having to move out. You can even remain in it until you go into long-term care or until you pass away – and still be a full homeowner (with certain types of equity release).
But there are a LOT of downsides to equity release. It is really only suitable for a small percentage of people. Here’s why…
- What is equity release?
- Different types of equity release
- How can help it help?
- The downsides to equity release
- Alternatives to equity release
Equity release allows individuals or couples aged 55 and over to release money from the property they live in without having to make any monthly repayments.
You can opt to do this with a tax-free lump sum or smaller cash injections to top up your retirement income.
According to the Equity Release Council, equity release can play a crucial role in retirement funding, with flexibility and safeguards built into plans.
In order to qualify for equity release, you must:
- Be the homeowner
- Have a property of standard construction
- Own a property worth more than £70,000
Still paying off your mortgage?
Many people think you need to totally own your home to be eligible for equity release. In reality, as long as you’ve paid off some of your mortgage, you could qualify.
If you only recently purchased your home, it could be expensive to opt for equity release. The ‘equity’ is basically another loan – which can be used to pay off your current mortgage in full. If you’ve got early repayment charges or you’re still in a fixed-term deal, that could get expensive.
However, if you’ve got less than 5 years or so left on your mortgage, equity release could free up your cash and pay off your debt.
What’s the catch for equity release?
The ‘catch’ is that the income-provider must be repaid at a later stage, usually when the homeowner dies. Thus, equity release is particularly useful for elderly people who do not intend or are not able to leave a large estate for their heirs when they die.
There are a variety of ways in which you can release cash tied up in your home without having to move out.
You borrow against the value of your home while you continue to live in it. You don’t have to make repayments: instead, interest is added to the mortgage and both are repaid when the property is sold.
The total you can borrow will depend on your age, your health and the value of your home. The loan plus interest is repaid when the property is sold — typically, when you die or leave your home permanently (e.g. you go into long-term care).
You can’t borrow the full amount of your home’s value – usually the maximum is around 70%.
You can also choose to make some monthly repayments. These can be interest-only or interest and capital, so that the amount due when you die or move into long-term care is only the amount borrowed (minus any capital you’ve also repaid). This helps you leave more to your family as an inheritance.
How is the mortgage repaid?
The sale of your home when you die will cover the loan repayment. If your spouse lives in the property too, they can live there until they die or move into long-term care.
Your family won’t be left with a massive bill. People worry that accrued interest means they’re leaving debts on their estate. In fact, the Equity Release Council regulates providers to prevent this.
You can’t borrow the full amount of your home’s value, which limits how much the loan repayment will be. If, once estate agent and solicitor fees are paid, the amount left over from the sale of the property is less than the loan repayment due, the full proceeds go towards the loan.
Then the rest is written off. Nobody is left with your debt. This is called the ‘No Negative Equity Guarantee’.
Home reversion schemes
You sell all or part of your home at a reduced price and, in exchange, live rent-free for life in your home and receive a cash lump sum.
When you die, your property goes to the scheme. You can’t leave it to your family as an inheritance.
Deciding on an option
Deciding on which one of these options you go for will depend on the following:
- The value of your home
- How much equity is available in your home
- Your age
- Whether you would like to leave an inheritance
- Whether you want to retain ownership of your home
While chances are pretty good you have some form of retirement fund in place, there is always the worry that it won’t last long enough.
By opting for an equity release, you will have access to extra funds without having to put yourself in the uncomfortable position of having to sell important assets, such as your home.
It also puts you in the position to put your funds toward some of the following:
- Clear your debts
- Retire a little earlier than planned
- Top up your regular income
- Do home improvements
- Adapt your home to changing needs
- Help your children invest in property
- Pay medical bills
- Take regular holidays
- Help your children pay off education fees
There are really endless ways in which you can put the tax-free payout you get from an equity release to good use!
In many ways, equity release almost sounds too good to be true.
And, sure enough, there are a LOT of downsides to equity release.
the interest rolls up
There are equity release schemes that are short-term (take a look at those if you think they could work for you) but on the whole they last until you die or move into care. That money builds up and up and can mean there is nothing left over at the end.
You can choose to make interest-only monthly repayments to keep these costs down, but this would eat into your tax-free lump sum that you’ve received!
the interest is high
Interest rates for equity release are higher than ordinary mortgages. This means that as the interest payments roll up they grow alarmingly quickly.
it’s difficult to get out of the contracts
In fact, well nigh impossible in some cases. Be VERY careful about the contracts. Make sure you have an independent financial advisor guiding you through it. NOT a sales person from the equity release company. You can’t trust any of those.
Find an independent financial advisor through VouchedFor here.
Releasing equity from your home will reduce the value of your estate and the amount you’re able to leave as an inheritance when you die. If you opt for home reversion, there’s nothing to leave your children or dependants.
If you don’t have kids or dependants, this is probably not problematic to you! However, if you do want to leave some money for your loved ones when you’re gone, it’s a good idea to discuss your options in depth with a financial advisor.
you get stuck in your home
Many people love their home while they are strong enough to look after it but many people who have taken out equity release in their sixties have found by their seventies and eighties that they don’t want to run this home anymore. It’s too big and difficult for them.
Taking out equity on your home, however, reduces the capital you may have from the sale of this property to move into a more suitable place.
This is why we say you should wait until much later to even consider equity release. In fact, for many, many people, downsizing is a much better option. You have more control and have less to look after later on.
Many older people are better off renting a place to live than buying, as there is even less work to do on the home.
Your home’s value
The future market value of your home may increase or decrease over the years, which could have a negative impact on the amount left over for your family to inherit.
Equity release may affect your tax position and your entitlement to state benefits. The lump sum you receive may take your savings over the benefits threshold. This is why many people opt to take a drawdown option – getting a smaller, regular income from equity release rather than a large lump sum.
It’s of the utmost importance that you talk to a financial advisor before making any final decisions about equity release, as the consequences will be long-lasting.
Before borrowing against your home, you might want to explore other financing options.
These give you more control and, in the end, on the whole, more money.
Here are few ideas:
- Do you have any savings and investments that you could use?
- Could you move to a smaller property? Remember to take moving costs, fees and stamp duty into account. Downsizing gives you more control over your money and means you will have less to deal with in your home later on.
- If you only need a relatively small amount of money, would an unsecured loan be easier? Or could you borrow it from a family member and repay them from your estate?
- If you still have a mortgage, is it possible to extend your mortgage term for a few more years? (This is likely to depend on your age)
- If you’re on a low income, have you checked what grants or benefits you may be entitled to?
- Think about making extra money to keep yourself going. There are LOADS of ways that older people can make money and many of them are actually fun. Consider being a life model, for example. or working as a film extra. We have hundreds of ways that people can make money without too much effort in our Make Money section to take a look at some of those too.
- How to decide what to do with your pension pot
- Get what you’re entitled with the state pension changes
- How to retire early whatever the state pension age is