Equity release is a financial option available to homeowners, particularly those aged 55 and over, looking to unlock the value tied up in their property without having to sell it.

This can be an appealing solution for those who want to boost their retirement income, fund home improvements, or cover other expenses.

However, it’s essential to understand how equity release works, its pros and cons, and the different types available before deciding if it’s right for you.

What Is Equity Release?

Equity release allows you to access a portion of the money (equity) tied up in your home while still living there.

The funds can be taken as a lump sum, regular payments, or a combination of both.

The most common types of equity release are lifetime mortgages and home reversion plans.

Lifetime Mortgage

A lifetime mortgage is the most popular form of equity release. With this option, you borrow money against the value of your home, but you don’t need to make any repayments until you die or move into long-term care. Interest is added to the loan, and the amount owed increases over time. When the house is eventually sold, the loan and the accumulated interest are paid off, and any remaining value goes to your beneficiaries.

How Does It Work?

Interest Roll-Up: Interest on the loan is added each year, so the amount you owe increases over time. Some lifetime mortgages allow you to pay the interest monthly if you prefer.

Borrow a Portion of Your Home’s Value: You can typically borrow between 20% and 60% of your property’s value, depending on your age and the value of your home. The older you are, the more you can usually borrow.

No Monthly Repayments: Unlike a traditional mortgage, there are no monthly repayments. The loan is repaid when your home is sold after your death or when you move into permanent care.

Home Reversion Plan

With a home reversion plan, you sell a part or all of your home to a provider in exchange for a lump sum, regular payments, or both. You have the right to continue living in the property rent-free until you die or move into long-term care. However, since you’re selling a portion of your home at less than market value, the amount you receive will be less than if you sold the property outright.

How Does It Work?

Final Settlement: When the property is sold (usually after you pass away or move into care), the provider takes their share of the sale proceeds, and the rest goes to your estate.

Sell a Share of Your Home: You sell a percentage of your home to a home reversion provider. For example, if your home is worth £300,000, you might sell 50% for £75,000, even though the market value of that share would be £150,000.

Live Rent-Free: You continue to live in your home without paying rent, maintaining your standard of living.

Pros and Cons of Equity Release

Before deciding on equity release, it’s crucial to weigh the benefits and drawbacks.

Pros:

• Access to Cash: Equity release allows you to access money without selling your home or downsizing.
• Stay in Your Home: You can remain in your home for the rest of your life or until you move into care.
• Flexibility: You can choose to take a lump sum, regular payments, or both, depending on your needs.

Cons:

• Interest Accumulation: With lifetime mortgages, interest can grow quickly, significantly reducing the amount left for your beneficiaries.
• Reduced Inheritance: Since you’re borrowing against your home’s value, there will be less to leave to your heirs.
• Impact on Benefits: Receiving money through equity release could affect your eligibility for means-tested benefits.

Is Equity Release Right for You?

Equity release is not for everyone. It’s a long-term commitment, and it can affect your financial situation and inheritance plans. Here are some factors to consider:

1. Age and Health: The older you are, the more you can borrow. If you’re in good health and expect to live many more years, consider how the accumulating interest will impact your estate.
2. Other Options: Explore other options before committing to equity release. Could you downsize, remortgage, or use other savings or investments?
3. Impact on Family: Discuss your decision with your family, as it may affect their inheritance. Some providers allow you to ring-fence a portion of your home’s value to ensure you leave something behind.
4. Fees and Costs: Be aware of the costs involved in setting up an equity release plan, including arrangement fees, valuation fees, and legal costs.

In Conclusion

Equity release can be a practical solution for homeowners looking to access funds without selling their property, but it’s essential to fully understand how it works.

By considering the different options, weighing the pros and cons, and seeking advice from a qualified financial advisor, you can make an informed decision that best suits your financial needs and goals.

Remember, equity release is a significant financial commitment, so take your time to explore all your options before proceeding.