Equity release may appeal if you want to unlock some of the wealth tied up in your property, particularly if you’re struggling financially and don’t have cash savings to dip into.
When you release equity from your home, you are provided with a lump sum or regular income payments, or you may receive a combination of both. Interest on the money released rolls up over the years, and is usually repaid when you die, or move into long-term care and your property is sold.
Equity release is a major financial decision and you should carefully consider whether it’s the right option for you, as there are a number of downsides to think about before taking this route. It may be that an alternative way to produce a lump sum or income is more suitable, although this will very much depend on your personal circumstances.
Here, we look at when equity release may be an option worth considering, and when it may be best avoided, and how you can get more help so you can decide whether it’s the right choice for you.
If you’re looking for somewhere to start, you can get expert advice from an independent equity release specialist with Unbiased. They’ll listen to your needs and talk you through your options, so you can decide if equity release is the right option for you.
How does equity release work?
You can usually only take out an equity release plan if you’re over the age of 55, but there may be alternative options if you’re not eligible (see below for more information).
Equity release is essentially a special type of mortgage product that’s designed to provide a lump sum or regular payments, but without the need to make monthly mortgage repayments. The interest you owe instead rolls up over the years, and it’s only repaid, along with the amount you originally released, when you die or go into long term care.
Meanwhile, you can continue to live in your home, so you don’t have to face the upheaval and stress involved in downsizing, for example. You can find out more about how equity release works in our guide Equity release – what is it and how does it work?
There are two types of equity release plans, lifetime mortgages and home reversion plans. With a lifetime mortgage, the equity release provider doesn’t own any part of your property, but instead you borrow money secured against your home (which must be your main residence). Find out more about how lifetime mortgages work in our article Lifetime mortgages explained. These plans have become increasingly flexible in recent years, with many offering the option to repay some of the interest owed if you can afford to.
A home reversion scheme, however, involves selling a percentage of your home to the equity release provider in return for a cash lump sum (these are far less popular than lifetime mortgages, making up less than 1% of all equity release plans taken out in 2020). Learn more about home reversion in our article Home reversion – what is it and how does it work?
When might equity release be the right choice?
For starters, there are a number of eligibility requirements, so you should check these out before thinking about whether equity release is a possibility for you. You can find more information on the eligibility criteria in our article Am I eligible for equity release?
Equity release may be suitable in a number of scenarios, but it will very much depend on your individual circumstances. You might want to take out an equity release plan if, for example, you have debts to pay off that have far higher interest rates, to cover the cost of care for yourself or a relative, or to increase your retirement income if you’re facing a shortfall, particularly with the rising living costs. In these circumstances, releasing equity from your home could be helpful, and you can continue to live in your home.
It may also be suitable for you if you don’t have children or other family who you wish to pass on an inheritance to, and so you want to focus on enjoying your life by making the most of your assets now. Alternatively, you may desperately need the money to fund care in your own home, as you don’t have enough income to pay for this. Find out more in our guide How to pay for long-term care.
Before deciding whether equity release is right for you, however, you must seek specialist advice and to make sure you fully understand the product (see below). If you do decide on equity release, the right plan for you will depend on your personal circumstances, and whether you’re keen to keep ownership of your property, or if you’re happy to sell part of it.
If you think equity release might be an option for you, you can see how much wealth you could unlock from your home with this free, easy to use calculator.
When might equity release not be the right choice for you?
It’s important to remember that while you don’t have to make regular repayments on your equity release loan, as these are essentially delayed until you die or move into care, you still have obligations to your provider. The debt must be repaid at some stage, and could substantially reduce the amount you can leave in inheritance to your loved ones, which may mean it’s not right for you.
Bear in mind, though, that you could consider passing on some of the equity you’ve released as a ‘living’ inheritance to them. Some equity release providers offer an ‘inheritance guarantee’, so that you can ring-fence some of your property wealth to pass on a guaranteed amount. Learn more about the risks of equity release in our article Equity release – what are the risks?
Another potential pitfall is that equity release can impact on your entitlement to means-tested benefits, such as Pension Credit, Universal Credit and Council tax Reduction, as these are dependent on how much income or savings/capital you have. This doesn’t mean that equity release definitely won’t be right for you, but you should work out the impact it will have on your benefits, and seek advice on this.
It could also scupper any plans to move home or downsize. If you’ve released equity from your home and then sell, you’ll probably face charges if you want to use the proceeds to pay back what you owe. However, you might be able to get ‘downsizing protection’ from your equity release provider, so you can repay the plan in full without paying an early repayment charge. If you’re thinking of downsizing, read our article Five questions to ask yourself if you’re considering downsizing your home. Remember that your plans may change in the future even if you’re not wanting to move now, so it’s important to factor this in when taking out an equity release plan.
Equity release is also unlikely to be the right choice if you’re not comfortable or clear on what the charges will be. Interest charges can build up over the decades due to compounding (when interest is calculated each year on the amount released and the interest you’ve already been charged) which could leave your family potentially owing a large portion of your home’s value to the equity release provider. If you are paying interest at 3%, for example, this would double the amount owed after 24 years. Find out more in our article Costs of equity release explained.
What are your other options?
If you decide equity release isn’t suitable for you, there may be plenty of other options. For example, you may be able to release equity from your home by remortgaging.
However, you’ll of course have to keep up with regular mortgage payments once you have released equity in this case. Another option may be a retirement interest-only mortgage, which is similar to a standard interest-only mortgage but it’s assumed the loan will only be repaid when you die or sell the house. You can read more about retirement interest-only mortgages in our guide What’s the difference between a lifetime mortgage and a retirement interest-only mortgage?
Other options include downsizing to release a lump sum, taking out a personal loan, if you’re looking to borrow a relatively small amount, or drawing money from your pension. However, before considering any of these alternatives, it’s important to fully understand the implications. Read more in our article Six alternatives to equity release.
Where to get more help
If you’re considering equity release, your first step should be to seek advice from a qualified financial advisor.
You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guide on How to find the right financial advisor for you.
They can help you understand the best option for you and recommend a suitable product from a member of the Equity Release Council (ERC). The council has a number of product standards which help safeguard borrowers so it is important that any provider you choose is a member. Advisors can also be members of the ERC. You can search for an equity release provider that belongs to the ERC here.
If you’re looking for somewhere to start, you can get expert advice from an independent equity release specialist with Unbiased. They’ll listen to your needs and talk you through your options, so you can decide if equity release is the right option for you.
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