Equity Release

What is equity release?

Equity release refers to the different options available for those over the age of 55 to access the cash value (equity) tied up in their home. The money can be available in a lump sum payment, multiple smaller payments or even a combination of both.

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What are the equity release options?

Typically there are two primary options for equity release. These are:

1. Home Reversion Plan

With home reversion, you sell all or a part of your home to a home reversion provider. You’ll typically get between 20% and 60% of the market value of your home. This provider will then pay you a lump sum or smaller regular payments. You will legally have the right to remain living in the property rent-free until you die. However, you have to agree to keep the property insured and maintained during this period.

You also have the option to ring-fence some of the property for use at a later date, such as for inheritance. Even if the value of the property changes, the percentage you maintain won’t change unless you take further cash payments. Once the Equity release plan finishes, the property is sold, and the money made from the sale is shared according to the remaining proportions of ownership.

2. Lifetime Mortgage

Lifetime Mortgage is currently the most popular type of Equity Release. You retain ownership and take a mortgage secured on your property. The minimum age at which you can take out a lifetime mortgage. Usually, it’s 55. Like Home Reversion you can choose to ring-fence a percentage of the value as an inheritance for any family members. You can make repayments or decide to let the interest roll-up. The loan amount and interest is paid back after your death or when you move into care long-term.

Equity Release Advice

Equity release has changed quite dramatically over the years. The equity release sector in the 1980s is notorious for mis-selling techniques and salespeople who preyed on retirees and unsuspecting older homeowners. Many of these lenders pressured people into expensive contracts without explaining the terms of the equity release properly or glossing over the details. This lead to many older homeowners, retirees and pensioners owing more money than their home was worth.

While Equity Release has now become regulated by Financial Conduct Authority, and many lenders abide by the code of conduct put in place by the Equity Release Council (ERC), there are still many important points to consider when thinking about utilising Equity Release:

No negative equity guarantee                       

It’s important to use a lender that includes a ‘no negative equity guarantee’ in their agreements. This means that as a borrower, you will never owe more money to a lender than the value of your home. Any lender who is a member of the Equity Release Council will include this guarantee.

Understand the cost and how much money you need

Anyone who is considering using Equity Release should think about how much money they actually need, and only unlock the amount of money they intend to spend. Many borrowers pay fees for money that they don’t need and will never actually spend.

Be honest and transparent about your health

When taking out an equity release deal, it’s important to be honest about the state of your health. It can be tempting to tell a few white lies but ultimately it could cost you more money. This is because if you don’t live as long then the lender will get its money back sooner and so can offer you cheaper rates.

What are the disadvantages of Equity release?

Equity release doesn’t come without its pitfalls, and often times older homeowners are subject to mis-selling, coercing and other shady tactics to lure them into a contract. Be sure to know the major disadvantages to equity release before signing anything:

• Equity release can affect your entitlement to benefits and other grants
• Release schemes can often be more expensive than downsizing to a smaller home, since you are borrowing against your property, or selling it partially or entirely
• You will likely be reducing the value of any inheritance you wish to leave. Releasing equity will reduce the value you have in your home. A home reversion plan will usually make it more difficult to leave your property to beneficiaries
• You can incur large penalty fees if you decide to cancel the equity release scheme

Are there any alternatives to equity release?

If you are an older homeowner who is looking to raise funds quite quickly and don’t have the time for long-term investments, then there are other options to Equity Release which may suit your circumstances better than a lifetime mortgage or home reversion. These include:

• Credit
• Retirement interest-only
• Remortgaging
• Downsizing
• Renting out a room

Which option is best for you largely depends on your current financial situation, how much money you want to raise and what deadlines you have for raising that money.

Credit

A personal loan or a credit card may be useful if you only need to raise a small amount of funds. It can be especially cheaper to use a credit card with low interest for a small amount of money.

Retirement interest-only

Other types of mortgages can be viable alternatives to an equity release product. An RIO (Retirement interest-only) mortgage means you can borrow more than an equity release and generally only require a small deposit. An RIO allows borrowers to pay mortgage interest each month until they sell their house, go into long-term care or die. The loan is then repaid by reselling the house. Unfortunately the RIO market is relatively small, meaning competition is lacking and interest rates are high.

Remortgaging

You could potentially borrow more money with a remortgage than with an RIO loan or Equity Release. This is a slow-growing trend however, as many high street banks enforce an age limit on who they lend to. Currently only a few smaller building societies are changing the trend and could make this a helpful alternative to equity release in the future.

Downsizing

Selling your house and moving to a smaller property may be one of the best alternatives to equity release. By moving to a smaller and cheaper home, you can keep the profit made from the sale of your original property. It can be an appealing option for older borrowers whose children have moved out.

Renting out a room

The government’s Rent a Room scheme allows homeowners to earn up to £7,500 a year tax-free by letting out furnished rooms. This drops to £3,750 tax-free if you share the income with your partner or a third party. Renting out a room, short-term lets, holiday lets and bed and breakfast options can be viable if there is no urgent need for money, as they can allow for some extra income over time.