Equity release guide
Last updated on 1 June 2015
Do you need equity release?
Before considering an equity release scheme, it's worth looking at the alternatives first. Equity release can affect your tax position and eligibility for state benefits. You are strongly advised to get financial advice before opting for equity release. The adviser will help you consider all the angles. Whilst you might be able to unwind an equity release scheme, it can be costly and, while most schemes can be transferred to another home if you move, it will have to be a property approved by the provider.
Alternatives to equity release are:
- Downsizing to a smaller property or one in a less expensive area.
- Instead of buying a new home you could consider renting. There are sheltered housing schemes that offer rented accommodation. You can find out more about these at www.housingcare.org.
- You could use existing savings or investments to cover whatever it is you want to release equity for. If you've been saving for a rainy day, maybe this is it.
- If it's extra income you need, make sure you are claiming all the state benefits you are entitled to first.
- If you want to carry out repairs on your property, check if your local council offers any grants for these.
- You could consider cashing in a pension pot if you need a lump sum but this will reduce your future retirement income.
- Could you borrow the money anywhere else – for example, from relatives?
Types of equity release schemes
However, if you have explored all the options above and none of these are feasible, you could consider an equity release scheme.
There are two main types of equity release schemes: lifetime mortgages and home reversion schemes. With both types of scheme you have to be over a certain age. Typically, you have to be at least 55 or 60 to apply for a lifetime mortgage, and aged 65 to be eligible for a home reversion scheme*.
With these schemes you take out a mortgage secured against your home. Most providers will let you borrow up to a maximum of around 35% to 55%* of the value of your property. However, unlike normal mortgages, lifetime mortgages don't have to be repaid until the property is sold (at death or if you go into care or move in with relatives, say).
With most lifetime mortgages, the interest on the loan is added to the amount you owe and rolled up.
This means your debt can grow alarmingly quickly. At an average interest rate of around 6%* you can bank on your debt doubling in around 12 years. So if you borrow £50,000, expect to owe in the region of £100,000 after 12 years. This does not necessarily eat up all the equity you have remaining in your home - that will depend also on whether house prices rise and by how much. However, make sure you choose a lifetime mortgage that has a fixed or capped interest rate and a no-negative-equity guarantee.
A no-negative equity guarantee is a promise that the amount you owe will never exceed the value of your home. In a variation on this, some lifetime mortgages offer inheritance protection which is a guarantee that at least a set percentage of your home will remain yours to pass on to your family.
There are a few lifetime mortgages available that let you pay off some or all of the interest on the loan as you go, which has the benefit of capping your debt.
Another way to contain the cost is to choose a 'drawdown' lifetime mortgage. This releases lump sums (typically the minimum loan is £10,000 or £15,000 at a time) as and when you need them. The drawdown mortgage has the benefit of you only borrowing (and paying interest) on what you need at any given time.
Home reversion schemes
Home reversion schemes are different. Instead of borrowing the money you sell part (or even all) of your home to the reversion provider. However, you won't get the market value of the equity you sell. Much depends on your age - the younger you are the less you'll get. Some providers offer more if your health is poor.
For example, in February 2013 the consumer organisation Which? found that a 65 year-old couple with a property worth £250,000 could obtain £50,000 (20% of the property value) with one of the main providers, in exchange for a 72.3% share of the property. So an advance of £50,000 in reality cost £180,500. With two other providers the proportion was 73.8% (£184,500) and 59% ( £147,500).
With home reversion schemes you keep the right to live in your home rent-free (or for a token sum) until death or until you move into care.
Home reversion schemes account for a very small percentage of equity release schemes sold*.
Pros and cons of equity release schemes
If you are on a low income or need to make major repairs to your home, equity release can be a good way of raising the money and staying in your home. An increasingly popular reason for using equity release is to make gifts to family, for example, to help grandchildren buy their first home. However, there are pitfalls to watch out for.
- Costs can be high. Arrangement fees and the cost of advice for lifetime mortgages can run into thousands of pounds, though some providers will refund some costs.
- If you borrow too much at the start of the scheme or sell all of your home to a reversion provider, you could find yourself without any equity to fall back on in an emergency, to pay for care when you are older or to leave to your family.
- Interest rates on lifetime mortgages tend to be much higher than standard residential mortgages.
- With home reversion schemes you'll always receive less than your home is actually worth.
Taking out an equity release scheme is a big step and unless you are very confident with what you are doing, you should consult a financial adviser who specialises in equity release.
More information and help
The Money Advice Service is a free independent service that provides help and guidance on many personal finance issues including equity release.
StepChange Debt Charity (formerly known as the Consumer Credit Counselling Service) is a charity that offers help and advice on debt, but can also offer help and regulated advice on equity release.
Age UK is a national charity offering help and advice to older people. It has produced a guide to equity release which you can download for free.
Society of Later Life Advisers (SOLLA) can provide a list of financial advisers who have the SOLLA accreditation and specialise in dealing with people in later life.
The Equity Release Council (formerly known as SHIP) is the trade body for equity release providers, financial advisers, lawyers and surveyors. It publishes useful information and guides for consumers interested in equity release.
* Moneyfacts Investment Life & Pensions May 2015 Equity Release table.