Equity release: what is it and is it right for me?
5 min read
Equity release, available only to those aged over 55, is a way of withdrawing cash from your home without having to sell. You get your money as a tax-free lump sum or via regular payments.
There are two types of equity release: lifetime mortgages and home reversion plans.
What is a lifetime mortgage?
Lifetime mortgages are the most popular type of equity release. With a lifetime mortgage you borrow against the value of your home. You still own it, but you owe the lender the amount borrowed plus interest.
Unlike an ordinary mortgage, however, there is no set term or repayment date for the loan. Instead it is repaid from your estate when you die or when you move into long-term care.
Some lifetime mortgages allow you to make ad-hoc payments to reduce the capital balance each year, or monthly interest payments to reduce the amount of interest that is added to the loan.. Or, you may opt not to make any payments, rolling up the interest to be paid out of your estate, instead.
Typically, how much you can borrow is based on your age and your health.
What is a home reversion plan?
A home reversion plan is available to older borrowers, usually those above 65 years old. It differs from a lifetime mortgage in that with a home reversion, the equity release provider buys some or all of your property in return for a tax-free cash lump sum or payments. The agreement being that you can remain in your home, rent-free, for the rest of your life or until you go into care.
What you need to know
Equity release sounds like a no-brainer alternative to selling up, but there is a lot to consider before you decide if it is right for you and your family.
Interest rates on equity release products tend to be higher than conventional mortgages.
If you opt to have interest rolled up, be aware that it compounds, and compounding interest, as we know from how debt, savings and investments grow, is a powerful thing.
If you have the product for many years, the loan may end up much larger than you expect, potentially wiping out most of the value of your home.
Look for a no-negative equity guarantee, which means that even if the price of your property falls and your property is worth less than your loan after your death, your family will not be left with a debt.
If you go for a home reversion plan, the money offered will be a fraction of the money you’d get selling it the normal way, usually a maximum of 60 per cent of market value, but it may be much less.
Many such plans also stipulate that the property has to be empty within a few weeks of your death, which can be distressing for whoever has to clear your property during a time of bereavement.
Include family in the conversation about equity release
Discuss your decision about whether equity release is right for you with your whole family, including any children who may be managing your estate or expecting an inheritance.
Some plans allow you to ring-fence a proportion of your property’s future value to protect an inheritance, but other plans could result in there being no money left on your death to pass on.
Also remember that future property prices may be higher or lower than they are now, which will affect the size of the loan and any inheritance you are able to leave.
Don’t forget about the implications for the cost of care, or any benefits you claim. The value of your home may not be taken into account when assessing your assets for eligibility for a nursing home, for example, but any cash savings, including those gained as a result of equity release, definitely will be.
Have an upfront, open conversations about the implications of committing to one in later life with those that you love.
You may want to read Why release equity from your home?
Seek advice about equity release
All equity release providers must be regulated by the Financial Conduct Authority. You should choose one that is also part of the Equity Release Council, which will ensure certain important terms and conditions are adhered to. For example, that:
- you can live in your property for life or until you move into permanent residential care
- your family will never owe more than the value of your home when it is sold.
As equity release is a big decision, always seek independent financial advice from someone who doesn’t have a vested interest in selling you a plan, to discuss your options and get honest thoughts on whether it is suitable for you.
Laura Whateley is a freelance writer and author of Sunday Times bestselling book Money: A User's Guide. She has written for a wide variety of publications including The Times, The Guardian, Grazia, Refinery 29, Elle, Red and Stylist.
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