What is Equity Release?
For people aged over 55 years, equity release can be an option to access money that is tied up in their property, especially where they have generated a significant amount of equity in homes owned and lived in for several years, if not decades. Whilst it can seem an attractive proposition in providing a financial windfall without monthly payments, it’s a lifelong commitment that could prove to be a highly expensive one if you don’t do your research first.
How does equity release work?
There are two main types of “arrangement” – the most common is a lifetime mortgage, where you borrow an amount against the value of your home (around 60% maximum depending on your age), only payable upon the sale of the property, death or transitioning to full time care. The second is a home reversion, where you sell a portion of your home whilst still living in it. You can draw money down either in a lump sum, triggering interest payments on the entire amount, or through income drawdown, where you access specific amounts as needed, only paying interest on the money you’ve accessed.
Either option can prove costly as the interest “rolls up” every year. As long as the provider is registered with the ERC – Equity Release Council – the debt will never be more than the value of your home, however you will not then be able to pass this to your family. Similarly, there are high penalties for paying off a lifetime mortgage early.
Reasons for releasing equity
These can vary but typically include home improvements or extensions, helping family members out, i.e. giving children a deposit to get onto the property ladder themselves, or helping to fund retirement. However with strong housing markets and levels of interest, you could end up owning a lot less of your home in 20-30 years than you did aged 55 years, and having to pay out huge sums – sometimes over 40% of the property’s value – when you finally come to sell. Getting independent financial advice is absolutely critical before making any major decisions.
Best Equity Release Options for Over 55s UK
- Lifetime Mortgage: The most popular type of equity release is lifetime mortgage plan, where you borrow money secured against your home while retaining ownership. Interest is added to the loan, and repayment is typically made when you pass away or move into long-term care.
- Home Reversion Plan: You sell a percentage of your home to a provider in exchange for a lump sum or regular payments. You can continue living in the property rent-free, but you no longer own the entire property.
- Interest-Only Lifetime Mortgage: Similar to a lifetime mortgage, but you make monthly interest payments, preventing the debt from growing. This option is good if you want to leave more inheritance.
- Drawdown Lifetime Mortgage: This allows you to take smaller amounts of money as and when you need it, rather than a single lump sum. Interest is only charged on the money you withdraw, making it a flexible option.
- Enhanced Lifetime Mortgage: Tailored for those with certain medical conditions or lifestyle factors, this option might allow you to borrow more or receive better terms.
So what are the alternatives to equity release?
This will largely depend on the amount you’re looking to raise and also the size of property you currently own. You could for example, choose to downsize and move to a smaller property which could release a significant amount of money in the process. Some lenders offer retirement interest-only mortgages which could be a more cost effective option allowing you to pay off the interest each month; for smaller amounts consider a personal loan or interest-free credit card, as long as you’re able to comfortably pay the monthly repayments. Finally, if you have room to spare, the Government allows you to earn up to £7500 per year tax-free by renting out a room in your property.
It’s important to explore every avenue and option available to you before making what could be life changing decisions. Please talk to us for independent advice that will ensure you are fully informed.
