Are you a homeowner struggling with living costs and cash flow in your later years? Equity release can be a solution if you have more value tied up in your home than in other assets or easily accessible cash.
It can help you access a lump sum out of the value of your home without having to sell or move.
Statistics from the Equity Release Council show customers accessed over £2 billion through equity release products in 2023.
The funds can come in handy if you need additional retirement income or want to cover a one-off expense, lifestyle purchase, consolidate debts, meet homecare costs, or gift a ‘living inheritance’ to family or friends.
But is equity release worth it? It’s an expensive way to raise cash and has long-term implications, so you must think carefully before diving in.
Read on to discover the ins and outs of equity release to help you determine whether it’s a good idea for you.
How Does Equity Release Work?
With equity release, you can release some of your home’s value and turn it into cash. It’s simply a financial agreement or loan secured against your home.
You can unlock your property’s value through products that let you release or access the equity in the house if you’re 55 years or older.
You can release equity even if you haven’t fully repaid your mortgage. The lender allows you to access the funds you release in one lump sum, in small, ongoing amounts through a drawdown, or as a combination. Products you can use to release cash include:
Lifetime Mortgages – for people 55 and over
With a lifetime mortgage, you can borrow some of your home’s value at a fixed or capped rate.
You can get 20% to 60% of the property’s value and continue living in your home without making any payments. The amount you borrow, plus interest, is repaid from the sale of your house when you die or go into long-term care.
Home Reversion Plans – for people 60 and over
With a home reversion plan, you can sell all or part of your property and continue living on the property until you die or move into long-term care.
It can get you a lump sum or a monthly income, but remember, you won’t get the full market value of whatever you sell.
Once the property is sold, the proceeds are divided based on your and the lender’s portions.
What are the Risks of Equity Release with a Lifetime Mortgage?
The risk of a lifetime mortgage is that you can owe much more than you borrowed if you choose not to repay the capital or interest monthly.
Lifetime mortgages charge compound interest, so the amount you owe will increase every month. The interest is usually higher than the top rates of standard residential mortgages.
If you don’t make repayments to reduce the debt, the interest will compound and drastically increase the loan size, especially if you live for a long time.
For example, if you release £20,000 worth of equity at 60 with an interest of 6%, the amount you owe can double every 12 years.
Therefore, if you live until 72, you’ll owe roughly £40,000. If you live until 84, you’ll owe £80,000.
Making monthly repayments as you go can reduce this risk by lowering the debt you owe to ensure the interest doesn’t compound rapidly.
You can also avoid borrowing the total amount in one go so the interest doesn’t have a long time to compound. It can help you avoid paying interest on the whole amount for the entire period.
What are the Risks of Equity Release with a Reversion Plan?
The main risk of releasing equity with a reversion plan is that you’ll only get a fraction of the value of the portion you’re selling.
Providers buy all or part of the property at below-market value, usually between 20% and 60% of the actual value, mainly because they’ll have to wait many years to get their money back.
For example, if your house is worth £300,000 and you sell 50% to a reversion plan provider, they may offer you £75,000 instead of the £150,000 that the share is worth.
If the house later sells for £400,000, the provider will be entitled to 50% of the sale proceeds, which is £200,000, yet they only advanced £75,000!
You may also face penalties or other issues if you move to a care home, and the reversion agreement doesn’t allow it.
Providers may also require you to be vacated quickly after death, resulting in further stress for the family. Such risks make reversion plans less popular than lifetime mortgages.
How Much Does Equity Release Cost?
In addition to the interest, there are several fees to consider when entering an equity release agreement. These include:
Advice fees – Your financial adviser can charge a fee for their advice. Others may not charge for the advice but will get a commission from the provider when you take out an equity release plan.
Valuation fees – The lender may need you to pay the valuation fees for surveying the property. The amount can vary depending on your home’s value, and it’s usually paid when you apply.
Application fees – These are payable when the equity release transaction goes through. You can pay for it by borrowing a bit extra on the plan.
Legal fees – You’ll pay for the services of a solicitor who will deal with the legal aspects of the scheme.
The total fee amount can reach between £2,000 and £3,000, depending on your plan type.
Related reading:
- Reasons for remortgaging.
- Remortgaging to release equity.
- Remortgaging to buy another property.
- Remortgaging with bad credit.
- Remortgaging for home improvements.
- I own my house outright can I remortgage?
- Capital raising mortgages.
Is Equity Release Safe?
The FCA and ERC heavily regulate equity-release products to protect you.
Providers offering lifetime mortgages or home reversion plans must follow the FCA’s rules about equity release.
They must take reasonable steps to ensure any equity-release products they recommend suit you. When determining if it suits you, the provider must also consider how the equity release will affect your benefits and tax position.
The Equity Release Council (ERC) represents various parties involved in equity release, including lenders, qualified financial advisers, and solicitors.
It aims to provide information and protection when considering an equity release scheme. Entering equity release with a provider who is an ERC member provides further safeguards. These include:
- The right to stay in your home for the rest of your life or until you move into long-term care
- Fixed or capped interest rates for lifetime mortgages
- Portability or the ability to move houses later provided the equity release provider agrees that the new property is suitable as security
- The ability to make repayments without penalty
- A ‘no negative equity’ guarantee where you or your estate will not have to pay anything else if the money raised is insufficient to clear the loan when the provider sells the property
Tips for Equity Release and Pitfalls to Avoid
Always Seek Advice
Entering an equity release agreement is a big decision, so get advice from an independent, qualified adviser. It’s a requirement of the FCA that ensures you get a clear and accurate explanation of the equity release plan, its advantages and limitations, and the terms and conditions.
Avoid Taking Out All the Money at Once
If you take out all the money you release in one go, the interest will have a longer compounding time, increasing the size of your debt.
Borrowing in stages can be more cost-effective since it allows you to pay less interest over time, so consider taking as little as you need first and waiting as long as possible before adding to the debt.
The drawdown plan on lifetime mortgages makes this more accessible, and data from the ERC shows it’s preferred by over 50% of customers who take out new equity release plans.
Involve Your Family in the Process
The debt can significantly impact what you leave as inheritance, and your loved ones will likely need to sort the final repayment since it occurs when you die or move into long-term care.
Therefore, involving them in the process is vital to ensure they’re not caught unawares during the difficult time.
Know How Equity Release Will Affect Your Benefits
Turning the equity in your property into cash can affect the means-tested benefits you’re entitled to, such as pension or universal credit. You may still be treated as having the money to work out how much benefit you’re entitled to, even if you’ve already used the funds.
It can be complicated, so consult an independent adviser to determine how equity release will affect your benefits.
Ensure the Lender is an ERC Member
Taking out an equity release product with a lender who is an ERC member ensures you’re protected. ERC members must offer products that meet set standards and provide all the information they need to make an informed decision.
This includes information about costs, what will happen if you move properties, and how changing house prices can affect you.
Consider Alternatives
Equity release isn’t your only option for raising cash. Due to the costs and risks involved, it should be your last option. You should first consider alternatives like:
- Downsizing – You can sell the property and move to a smaller home suitable for your changing needs. You can then live off the excess cash or use it for care needs.
- Unsecured Borrowing – You can take out an unsecured loan provided you can afford repayments with your usual income. It’s less risky and cheaper than equity release.
- Savings and assets – Using your savings is a fast, cost-free option to help you pursue your desired goals. You can also sell other assets or investments that are less valuable than your home, such as your car or expensive jewellery.
Is Equity Release A Good Idea?
Equity release may be a feasible option if you need the money and don’t have any alternatives.
For instance, you may not want to downsize and move because it will impact your social life, or your income and savings aren’t enough to cover your immediate needs and retirement.
It can be a suitable solution if you’re okay with reducing the size of your estate or inheritance because:
- Your kids want to receive the money now
- You don’t have any children or beneficiaries
- Your children don’t need any inheritance and would prefer if you spent the money
Call us today on 01925 906 210 or contact us to speak to one of our friendly advisors.
Final Thoughts
Equity release can be helpful in your later years, especially if you’re struggling with cash flow or living and care costs. However, it has various risks and can be expensive.
Consider the benefits and limitations and how they will impact your estate, financial situation, and beneficiaries.
Ensure you seek advice from an independent and qualified equity release adviser to get the information you need to make an informed decision before purchasing a product.
Sources and References:
- https://www.equityreleasecouncil.com/wp-content/uploads/2024/01/240131-Equity-Release-Council-Q4-FY-2023-market-statistics-news-release-FINAL.pdf
