Should you equity-release?
It involves releasing money from your home while you're still living there
Over 55, own your own home, but struggling for cash/want a more comfortable retirement? The easy solution, according to the adverts at least, is to equity-release. While rates are the cheapest they've been in years, equity release itself is still an expensive and risky way to raise cash. In this guide I'll run you through the key points you need to consider.
Always consider downsizing first
Wondering whether equity release is a good idea? It certainly isn't something to be taken on lightly, so before you dive right in, first evaluate whether downsizing your property could be an option.
If you can sell up and move on to a smaller home, and live off the excess cash you have made, great. You may also find a property more suitable as you age – fewer stairs, perhaps, or maybe none at all. Our Selling your home guide has full info and tips on what's involved when selling a property.
If downsizing is right for you, don't put it off.
People in their 60s often say to me: "I'll do it in a few years."
A few years later it's: "Not yet."
And after that it's: "We're now too old to leave."
So if downsizing is right for you, consider doing it sooner. Having said that, if it's a home where you've lived for years and you have many friends in the community, don't underestimate the personal and social impact of moving away if you can only afford to downsize out of the area.
On top of this, the financial costs can be high, with agent fees and removal costs to factor in – so you'll still need money to finance this option initially. Have a read of our Moving Home Checklist guide for more information on what moving property will likely involve.
What is equity release and how does it work?
Equity release is a way to unlock the value of your property and turn it into cash. You can do this via a number of policies which let you access – or 'release' – the equity (cash) tied up in your home, if you're 55+. You don't need to have fully paid off your mortgage to do this.
As a rule, you can either take the money you release in one lump sum, in smaller amounts over time (known as drawdown), or as a combination of both. Yet make sure you do it in the right way as if you get it wrong, it can prove expensive, as these tweets show:
The most common form of equity release is a mortgage that isn't paid off until you die. So if you have no one to leave your assets to, it's a decent, though expensive, route to raise cash.
If you do have people to pass assets to, equity release generally means there will be less for them to inherit. Then again, it is your money, so prioritise your own standard of living.
1. Lifetime mortgage – for those aged 55+
This is the most popular form of equity release. Here you borrow some of your home's value at a fixed or capped interest rate.
You can either take the money all at once in a lump sum, or you can take it in smaller chunks as and when you need it – something known as drawdown. If you choose the drawdown option, interest will only be charged on the cash you've actually taken, and not on the money you're yet to draw down.
With both forms of lifetime mortgage, if you don't make any repayments then the interest will compound rapidly, as the amount you owe is increasing all the time. These days however, most lifetime mortgages do allow you to make repayments, be that repayment of the capital or just the interest, meaning you can reduce the overall cost. Typically there'll be a cap on the amount you can overpay by, normally 10% of the loan value each year.
A lifetime mortgage is different from a standard mortgage. If this is what you're looking for, check out our Cheap mortgage finding guide for tips.
2. Home reversion plan – for those aged 65+
Here a provider pays you a tax-free lump sum for a portion of your home at below market value. You can then live in the property (rent-free) until you die. When it's sold, the proceeds are split based on the percentage you own and the lender owns. So if your property value rises significantly, so does the amount it gets.
For example, if you sell a 40% share in a £200,000 property in return for a lump sum of £40,000, this cash you receive is at a huge discount to the £80,000 this share is actually worth (at current market prices) – mainly because the provider will have to wait many years to get its money back. Years later, when you die, if your home is eventually sold for £300,000, the provider would then be entitled to £120,000, which is equivalent to 40% of the sale proceeds.
So home reversion plans are better if property prices stay flatter, and worse if they rise substantially.
Equity release is only available to those aged 55 and over. If you're close to 55, you may feel like you're in a position where you can wait until then. However, if you're a homeowner who's under 55 and in more pressing need, it's worth speaking to a mortgage broker about the possibility of remortgaging, or contacting a financial adviser if your situation is particularly complicated.
Remortgaging is a good way of lowering what you pay towards your mortgage each month, and in some cases you might be able to raise further cash against your property. In recent years, several mortgage lenders have increased their upper age limits when it comes to who is able to apply for a mortgage – so if you're an older homeowner but not interested in equity releasing, don't automatically assume you wouldn't be eligible for a mortgage.
How much does equity release cost?
Average interest rates on lifetime mortgages are currently around 4%, with the cheapest rates nearer to 3%. This is the lowest rates have been for a number of years – yet note that they're still significantly higher than those for most standard mortgages. And just because a deal has a low interest rate, this doesn't always mean it's the best deal.
When weighing up which equity release product would suit you best, remember that the eye-watering price-tag your estate would have to repay comes if you've chosen not to make monthly repayments to reduce the debt, so the interest compounds and compounds.
For example, borrow £20,000 aged 60 at 5.1% on a £120,000 home, and the amount you owe doubles roughly every 14 years. So live until 74 and you owe around £40,000, live until 88 and you owe £80,000.
As well as the actual cost of the interest, you'll have to pay a number of fees. This will likely set you back between £1,500 and £3,000, depending on the type of plan being arranged, and will include arrangement & valuation costs, as well as fees for legal work and a surveyor.
Quick equity release tips and pitfalls to be aware of
If you've read the above and you're considering whether equity release is right for you, make sure you have a read of these quick tips:
1. Don't borrow the full amount you need in one go
The sooner you borrow, the more expensive it is, as the interest has longer to compound. So borrow as little as you need now, and wait as long as you can to do it again.
For example, if you think you may need £40,000 from your home to cover 20 years, only take what you need now and wait to take more until needed. Drawdown lifetime mortgages are set up to make this easier.
2. Get ADVICE before you do it – preferably from somebody who's a member of the Equity Release Council
Members of the Equity Release Council must promise a 'no negative equity' guarantee, so your estate will never owe more than your home is worth. They've got dedicated advisers who can answer any questions you've got, and you can speak to them via telephone, video or face-to-face in some cases. Members of the Equity Release Council can be identified by the TrustMark seen on the right of this paragraph.
Alternatively, speak to an independent financial adviser about your situation and the possibility of equity releasing. If you think that remortgaging is a better option, speak with a mortgage broker who can advise on the best mortgage deals for you (note that general mortgage brokers won't be able to advise on equity release).
3. Be aware that equity releasing can affect your benefits
Having cash rather than a property can affect the benefits you're entitled to, for example pension credit, universal credit and others. So if you're entitled to those, check the impact of equity releasing first. If you're unsure, ask an equity release adviser to check what the impact would be.
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