What is equity release, how does it work, and could it help you unlock the value tied up in your home? FiftyLife investigates.
Equity release is a way of getting your hands on cash tied up in your home. According to The Telegraph, more than £3 billion was released via this method in 2017, the highest amount on record. 37,000 new customers unlocked an average of over £62,000 from their property.
So clearly, for some people it is the most reasonable option for getting extra cash when they need it, but is it the right option for you?
As a homeowner over the age of 50 you’ve likely paid off a significant proportion of your mortgage or you own your home outright. Instead of selling your home to receive its cash value, or ’equity’, instead equity release lets you access that value while still living there. It’s a set of finance products which let you loan money, secured against your home. Alternatively, you can sell some or all of the property for cash. In either case, you do not need to move house in order to benefit from equity release on the property.
The money gained from equity release can come as a lump sum, or a series of monthly payments provided over a set period.
Depending on the type of equity release scheme, this money could be paid back at a later date, when the property is sold, or when the customer dies and the value is reclaimed from their estate.
These schemes are typically built around the needs of older people, and in some cases there could be an age requirement to qualify for them.
Equity release is built around helping older people, retirees for example, who find themselves with reduced income despite having money tied up in assets like their home. In the right circumstances, equity release could help these people make the most of later life by unlocking that value for them to enjoy.
People might decide to opt for equity release for all sorts of reasons:
- Downsizing involves moving house, which can be a lot of hassle. Equity release saves you the headache of leaving your home behind.
- The funds unlocked from a home via equity release could be used to repay a mortgage.
- If savings are running low, equity release could fund home repairs, maintenance, or improvements.
- Equity release could help younger family members, children or grandchildren for example, get onto the property ladder themselves.
- You might simply want to boost your regular income in retirement to make the most of your golden years.
- You might choose to use the cash to pay for care in your later life while remaining at home.
According to Key Retirement, a UK-based equity release firm, the most common use of these funds is to carry out works on the home or garden (64% of those surveyed in 2017), followed by going on holiday (32%) and paying off debts (30%).¹
Equity release typically comes in two distinct types: lifetime mortgages and home reversion plans. Both involve unlocking the value of your home, usually to boost your retirement income, the difference lies in how and when that money is paid back.
Here, you borrow money which is secured against the value of your home, just like a regular mortgage. Where it differs is in the fact you usually repay nothing while you’re still living in the property.
When you die or move into care, the money borrowed, plus interest, is repaid to the lender. Reputable companies usually offer a ’negative equity’ guarantee, which means that the money you owe can’t be more than the value of your property.
Variations on this method include interest-only lifetime mortgages. Here, you pay the interest on the mortgage on a monthly basis. This will increase your outgoings, but you could reduce what is reclaimed from your estate when the property is eventually sold.
You can lower the interest on a lifetime mortgage by using a drawdown scheme. Here, you only withdraw money against your property when you need it, and interest is calculated only on what you’ve borrowed so far.
Home reversion plans
Here, you sell your home, or a percentage of it, to a reversion company (without having to move out) in return for a cash lump sum, regular income or both. The reversion company is repaid when you die or leave the property. Unlike a lifetime mortgage, this option usually lets you be sure of how much equity will be left in your property to form part of your estate.
However, to protect the lender’s interests, the value they put on your property could be much less than its actual market value. How much less could depend on factors like your health and lifestyle, anything which might affect when the lenders are likely to see a return on their investment.
Because you could lose out on a substantial chunk of your home’s value, home reversion plans could be viewed as the less favourable option compared to lifetime mortgages, and you should carefully weigh up your options before proceeding with any equity release scheme.
Equity release is not for everyone, and you should seek independent financial advice to determine whether it’s the right option for you. In general, these schemes represent an immediate payoff, but could come at a longer-term cost.
You stay in your home if you opt for equity release. The fuss and expense of downsizing are eliminated.
Your outgoings should stay the same. With the most common types of equity release, other than one-off fees to set up the scheme, you usually won’t pay anything until you sell your home, move into care, or pass away.
Equity release is flexible. You’re not restricted in how you spend it, and you can even release money as and when you need it via a drawdown scheme.
Interest can stack up. Longer equity release schemes mean longer interest buildup, which could end up costing the entire value of your property.
It reduces your estate. With some or all of your property’s value going to the provider, it could mean a reduced inheritance for your loved ones.
It freezes the value of your home, or at least some of it. Cashing in on your house’s current price means you miss out on any increase in its value.
You can get a rough estimate of the amount of equity tied up in your property by first finding out how much it’s worth, and subtracting your remaining mortgage, as well as any outstanding loans secured against the home. What remains could be a good indicator of what you might receive through equity release.
Getting your property valued could cost money. However, some estate agents will give free valuations, but if you can’t find one offering this near you, you can get creative. Similar homes in your area could have sold recently, or even be up for sale currently. These values could be a solid indicator of how much your property is worth. Try looking at websites like Rightmove or Zoopla to gauge current property prices in your area.
Alternatively, you can use the UK House Price Index.
Your mortgage provider and other lenders might be issuing you regular statements indicating your balance outstanding to them. If not, give them a call and they’ll be able to update you on exactly how much you have secured against your property.
In some cases, a lender might require that theirs is the only claim on your property. In this case, you’d need to repay your existing mortgage from your release of home equity. Others might be more forgiving, but this would be on a case-by-case basis. Shop around and seek independent advice on which options apply to your circumstances.
More and more people nowadays are reaching retirement without having cleared off their mortgages. There are all sorts of possible reasons for this, from investments which didn’t perform as well as anticipated, to simple bad luck.
In light of this, lenders present a range of options for those wishing to avoid their mortgage becoming a financial burden in later life.
Some lenders place a minimum age requirement on eligibility for equity release, most commonly this is 55. However, the general market is aimed at people aged between 65 to 75. This is because, generally speaking, the later in life you release equity, the less time interest has to build up.
According to Age UK, the state pension age is currently around 65 for men, and around 60 for women. One possible approach is to wait until retirement until you release equity, that way you’ll know exactly how your finances are looking, and how much you could need to top them up.
If you release at the earliest possible time, 55 in most cases, then the money you take out against your home could have many decades to accrue interest. You should be certain that your plan has a no negative equity guarantee, which caps the total amount owed to the lender.
A drawdown plan could be another good way of keeping interest as low as possible if you’re sure you want to release equity early. By only releasing (and paying interest on) chunks of your property’s value at a time, you avoid paying for the privilege of having money which you aren’t currently using.
The cash you unlock from equity release is tax-free. However, it goes without saying that what you do with the cash once you have it might be subject to various taxes. Talk to an Independent Financial Advisor about exactly what your plans for the funds are, and they’ll be able to help with making that as tax efficient as possible.
Drawdown equity release, where you only unlock portions of the property’s value at a time, could help you protect your money from additional taxes.
Remember also that releasing equity could lower the value of your estate. This doesn’t sound like a good thing, but in some cases, it could reduce your liability for inheritance tax.
If your estate is valued at a total of £325,000 or greater, inheritance tax is payable at 40% of the estate’s value. Considering that the value of a person’s home tends to make up a big chunk of their assets, accessing that value early could push you below the threshold, leaving more inheritance for your loved ones.
Previously, you could only release equity on a home which you owned and lived in yourself. In recent years, however, equity release products aimed at landlords have begun to enter the market.
Since it’s such early days for these equity release products, it’s important you get expert advice if this is something you’re considering, to be sure both you and your tenants are protected.
These schemes could be subject to extra checks and eligibility requirements. They could also be restricted to certain types of property, or properties of certain values.
Equity release is not for everyone, and you should get advice before you enter into an arrangement like this. Other options for raising funds in later life are available, from downsizing to various different types of borrowing.
If your current property is simply bigger than you need now, selling up and moving to a smaller and cheaper retirement pad might be right for you. You’ll no longer be paying to maintain a large property, and you could get the lump cash sum from selling your bigger home.
On the other hand, moving house can be stressful, and there are all sorts of fees and expenses to cover which risk eating into the profit you make.
There’ll always be value in having a roof to put over someone’s head. With more and more young people priced out of the housing market, the demand to rent is unlikely to drop any time soon.
At present, you pay no tax on rent earned from a lodger up to the value of £7,500. That’s a nice little earner before you have to worry about the taxman, and lets you stick around in the home you’ve come to love.
Other borrowing options
Equity release isn’t the only financial means of accessing funds in retirement. You could remortgage your home, for example.
Alternatively, family members might be able to help you out with extra funds on a more informal basis without entering into a binding contract.
Equity release is perfectly legal and, in some circumstances, could be a good choice. But it’s also a complex financial product with multiple different versions, all secured against the roof over your head. With such high stakes, it’s critical you shop around and get expert advice on what’s best for your personal circumstances.
Problems with equity release
There are some pitfalls when it comes to equity release which you should be aware of. Most commonly, interest rates are worth keeping an eye on. Different providers will offer different interest rates, and these can quickly stack up.
You might find that a good deal on this type of product is one which caps the interest you pay at the value of your property. You can also repay the interest on a monthly basis to help you stay on top of things.
Meanwhile, the deal you enter into with your provider will set a value on your house as it stands today. You’ll reap the benefits of equity release based on its current price, which means that if its value were to rise significantly over the years, you could feel cheated when the time comes to settle up.
The cash you’ll receive through equity release could impact on finances like benefits entitlements and eligibility for state-funded social care, if the need arose.
It’s a good idea to consult your family about entering into this agreement, as they could end up handling the consequences as part of your estate.
When it comes to home equity release, or any other means of topping up your retirement income, there’s a lot of free advice online to help you make the right choice.
The Money Advice Service is a financial advice organisation. Their website explores not just a breakdown of equity release, but also other options for those looking to free up some finances in later life.
Which? is an independent consumer association who provide expert advice for more or less every product, service, and sector you care to name. As you might expect, their site contains a lot of help when it comes to this complex and nuanced type of finance product.
Age UK is a registered charity with a dedicated helpline for those considering an equity release scheme on their home. They employ specialist advisors to talk you through your options.
One other option which might help you secure peace of mind is Life Insurance. FiftyLife offers specialist cover for the Over 50s, with low premiums and no medical questions asked.
Here, your loved ones receive a cash lump sum when you die which they could use to recoup the cost of care, pay funeral expenses, or anything else which might help them out.
To see if this could be right for you, get an online quote today or call our friendly, UK-based team on 0800 294 0750.