Equity release – is it right for you?

In the current cost-of-living crisis, many older people are feeling the pinch. While prices are shooting up, their income is rising at a much slower rate (if at all).

Not surprisingly, therefore, many are turning to equity release. This method of raising money can work well for older people who are ‘asset rich but income poor’. In other words, they own valuable assets such as their home but live on a modest income.

If that applies to you, equity release is an option you might want to consider, to release some of the cash locked up in your property.

But of course, there are pros and cons, and it’s important to assess these carefully before proceeding.

Who can do equity release?

There are two key requirements. The first is that you must be 55 or over (home reversion plans are only available to over 60s).

The second is that there must be equity available in your home. That means the mortgage must be paid off or the balance outstanding must be significantly lower than the house’s current value. Of course, many older people do find themselves in this position.

There are two main types of equity release scheme, home reversion plans and lifetime mortgages. I’ll cover each of these in turn.

Home reversion plans

With a home reversion plan, the provider buys your home but guarantees to let you and your partner (if you have one) go on living there rent-free until you die or go into long-term care.

After this the company normally sells the house and takes its profit. Your beneficiaries will not receive any proceeds from the sale or benefit from any rise in the property’s value.

Note that as the company is allowing you to stay in the house until you no longer need it, you won’t receive the full market value of your property.

Home reversion plan providers will usually pay you only 30% to 60% of the value of your home. How much you are offered depends on how old you are and how long the company expects you to go on living at the property.

Lifetime mortgages

Lifetime mortgages are similar to ordinary mortgages except no repayments have to be made until the house is sold.

You receive tax-free cash to do whatever you like with. Eventually of course this will have to be repaid with interest, and the rates charged are typically a bit higher than standard mortgages. As you retain ownership of the property until it is sold, however, this cost may be partly or wholly offset by the property’s rise in value.

There are two types of lifetime mortgage, lump sum and drawdown. A lump sum lifetime mortgage is a loan secured against your home, giving you access to a one-off pot of cash. 

A drawdown lifetime mortgage lets you draw down cash in stages after an initial lump sum, with interest only payable on the money released. A drawdown lifetime mortgage is therefore likely to work out cheaper overall than an equivalent lump sum mortgage.

In either case, how much you can borrow depends on a number of factors, including your age, the value of the property, and your health. At 67 you can typically borrow around a quarter of the value of your home, rising to around a third by your mid-70s,

If you have certain life-limiting medical conditions, you may be able to borrow a higher proportion of your property’s value or obtain a better interest rate via an ‘enhanced’ plan.

Lifetime mortgages (with drawdown in particular) are nowadays by far the most popular equity release option. This is because of their greater flexibility and the fact that you retain ownership of the house and can therefore benefit from any rise in its value.

Negative equity

With both home reversion plans and lifetime mortgages, you are protected from negative equity (i.e. the risk you or your beneficiaries will end up owing more to the scheme provider than the property is worth).

Provided the company is a member of the Equity Release Council (see below), any shortfall at the end will be written off.

Opting for equity release is a major decision, however, and will clearly affect how much money will be left for your children and any other beneficiaries to inherit.

It’s important therefore to discuss it with them and get their views – although in the end it is of course your money and your right to do whatever you want with it.

More Points to Consider

Here are a few more things to bear in mind before opting for equity release.

• Consider as an alternative downsizing to a smaller property and/or moving to a less expensive part of the country. This can be a cheaper way to release funds from your home if you don’t mind the disruption. But do this sooner rather than later, since people typically become more reluctant to move as they get older.

• As mentioned above, ensure that the company you deal with is a member of the Equity Release Council. Their members must abide by a strict code of practice and offer a no-negative-equity guarantee.

• Taking cash using equity release may affect your eligibility for some means-tested benefits. This applies especially if you take a large lump sum, as you may then exceed the savings limit for benefits such as pension credit. With a drawdown lifetime mortgage – where you take money in chunks as the need arises – you may be able to remain under the capital limits and therefore qualify (or continue to qualify) for these benefits.

• Other things being equal, leave it for as long as you can. The later you take equity release, the less costly it is likely to prove overall.

• If you don’t have family or others you want to leave your wealth to, cost isn’t such an issue, though. In that case there is much to be said for taking equity release to improve your quality of life and leaving the money be repaid out of your estate when you die.

• If you have bought your house on an interest-only mortgage and don’t have the money to pay it off, equity release can be a good way to repay the loan and reduce your monthly outgoings.

• You don’t have to do it all in one go. Lifetime mortgages in particular are very flexible. And, as mentioned, with a drawdown plan you can take money in chunks when you need it and interest will only accrue on what you have withdrawn so far.

• Finally, you will normally have the option to reduce the balance on your equity release loan by making regular and/or lump sum payments. Obviously not everyone will want to do this – but if you receive an inheritance, for example, you might want to use some or all of this to reduce the balance outstanding.

Closing thoughts

If you are looking for a way to release money from your property, whether to fund specific purchases or just to make later life more comfortable, equity release is certainly something you may want to consider. 

The main downside is – of course – that ultimately there will be less money to pass on to your descendants. All reputable providers, however, offer a no-negative-equity guarantee. They may also be able to arrange plans where a certain amount of cash is guaranteed to remain in your estate, if you wish.

Equity release interest rates in most cases are fixed for life, so you will know from the start the liability you are taking on (of course, the longer you remain living in your home, the larger the sum eventually payable will be). 

If you think equity release may be right for you, you will need to discuss this fully with an independent adviser before proceeding. Two of the best-known firms in this field are Key Equity Release and Age Partnership, but others are available as well. The Equity Release Council has a full list of members on its website.

The adviser will discuss your needs and circumstances, and – assuming they think equity release is right for you – make a recommendation from the range of products on the market. You can, of course, speak to two or more different advisers if you wish before making any final decision.

As always, if you have any comments about this article, please do leave them below.

Nick Daws writes for Pounds and Sense, a UK personal finance blog aimed especially (though not exclusively) at over-fifties.

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