Should you use equity release?
Equity release means releasing money from the value of your home, either as a lump sum or as a new monthly income.
You get to stay in your home but use the value of the equity you own in it to generate a new source of earnings.
You can boost your retirement income if your pension is too small or you want a lump sum to spend as you wish
If you are asset-rich but cash-poor, it lets you convert your highest-value asset - your home - into a new source of regular income.
But equity release schemes are not for everyone: they can be complicated, sometimes do not offer value for money, and usually come with many hidden costs and risks.
How does it work?
When you release equity from your home you will take part in an equity release scheme. There are numerous different schemes available on the market so you will have to seek professional financial advice before deciding which one you would like to go with.
With most equity release schemes you will be borrowing money against the value of your home, with this money being repaid when your house is sold - usually when you die or move to a care home. These schemes work on the principle that you will be lent part of your home's value in return for a share of the proceeds when your home is sold.
What equity release schemes are available?
There are 2 main equity release schemes on the market at the moment.
Home reversion schemes
If you take part in this kind of scheme you will sell your home (or a share of it) to a home reversion company, in return for a lump sum or a regular monthly income. If you decide to sell the entire value of your home you technically become a tenant, but have the right to live in your home rent-free for the rest of your life.
The home reversion company gets a payout either when you die or when the property is sold. If you sell your whole property to the reversion company, you will typically get between 30% and 50% of its value, the maximum usually being about 60%.
Older people will get more than younger people, and men will get more than women, because of differences in life expectancy.
The benefits of releasing equity in this way are that you will not have any ongoing repayments to make, and you will know at the outset what share of your home you will be leaving to your family (as long as you only sell a share of your property to the reversion company).
You also may get a bigger payout if you are a smoker or suffering from a serious illness as, rather morbidly, you are likely to have a shorter life expectancy. However, reversion companies can be quite selective about the houses they take on, so there is a chance your home may not be eligible for a scheme of this sort.
To speak to a qualified advisor about a home reversion scheme you can fill in your details on our enquiry form.
These work by securing a loan on your property, either as a lump sum, monthly income, or both.
You do not have to pay anything in the loan term as the interest is 'rolled-up' into the price of the loan. Your lender is repaid the loan amount plus interest from the sale proceeds when your home is sold.
The older you are, the higher the percentage of your property value you can borrow. Lifetime mortgages of this nature can also be an appealing option because there is no interest payable while you are alive, and most loans come with fixed interest which reduces risk. They can also sometimes be available to people as young as 55 whereas most equity release schemes are only eligible for those aged 60 and over.
However, although usually set at a fixed rate, interest payments can quickly mount up - thus reducing the amount eventually paid out to your family when the house is sold.
To speak to a qualified advisor to get more advice about a lifetime mortgage you can fill in your details on our enquiry form.
Who would equity release schemes be suitable for?
Usually you will have to be over 55 years old, have no outstanding mortgage to pay, and own a property in a reasonable condition to be eligible for equity release.
Therefore it will suit those who are later on in life, usually retired, and need some extra income to supplement their pension or other income.
Benefits of equity release include the obvious appeal of receiving a lump sum or generating a new monthly income - or both. Also, the money that is released from the value of your property is usually tax-free, unless you go on to invest that money - in which case you will have to pay tax on any growth.
The extra income generated from equity release may also be used to legitimately take the sting out of inheritance tax, or help to pay for care bills.
What are the risks of equity release?
Equity release plans can potentially cut the amount of money your family will inherit when you die. What's more, members of your family may be anticipating moving into your property when you have moved out, or keeping it in the family for sentimental value, among other countless reasons.
However if you release equity on your property you will not be able to leave it to your family. Therefore it is important to discuss your intentions with your family before going ahead.
If you receive means-tested benefits, these might be reduced or stopped completely if you decide to release equity. So remember to check if you will still be entitled to benefits upon releasing equity, or you could find that you are earning less than before.
Most equity release plans involve paying valuation and legal fees, and you will usually be charged for the surveying of your property. You will also still be responsible for maintaining and repairing your home, and will still have to pay Council Tax.
Equity release schemes calculate how much money you will get based on your average life expectancy. Men therefore will generally be granted a higher percentage of the value of their property than women, as their average life expectancy is shorter.
However it is of course impossible to predict how long you will live, so any projection will only be based on rough (and often unsubstantiated) statistics.
What are the alternatives?
Equity release will not suit everyone, and there may be other viable ways of generating extra income using your existing assets. For example it may be a good idea to move to a less expensive property, thereby releasing some of the money that is currently tied up in your home.
Alternatively you could secure a normal loan against your existing property that does not carry so many risks and still allows you to own your home outright - so you can leave your home to your family when you die.
Downsize your home
You could downsize to a smaller home if your family have grown up and moved out, you are happy to move to a cheaper area, or you simply do not need as much space any more.
Whatever your reason, if your home is bigger than you really need, moving to a smaller property could be the simplest way to boost your retirement fund.
The amount you could make will be the difference in price between what you sell your current house for and how much the new one costs.
However, it is easy to underestimate the cost of moving house. As well paying for the move itself, there are other costs and taxes when buying or selling, such as estate agent fees, paying for a solicitor and stamp duty.
You will also need to find out how much a new home could cost to make sure downsizing is worth it.
What else should I consider?
If you do decide to go ahead with equity release, look for schemes carrying the SHIP logo (Safe Home Income Plans). This means you will be given several guarantees: the right to live in your property for life, the freedom to move to another property without penalties, and you will never owe more than the value of your home.
If you are concerned about the legitimacy of an equity release company, you can make sure that they are regulated by the FCA (Financial Conduct Authority) by checking their register. This contains a public record of financial bodies that fall under the FCA's jurisdiction, so if an equity release scheme is listed on here, you will know you can trust them.
You are likely to get a better deal on equity release the older you are. So if you have only just retired, it might be worth waiting a few more years before releasing equity. Also remember to check whether any plan you are considering has penalties in place if you move or sell your home before death.
If you are going for a lifetime mortgage, do not just be seduced by the headline rates - look at the overall picture of how much you will be paying.
Finally, and very importantly, you must seek independent financial advice before proceeding with anything. As there are so many different equity release plans on the market and such a variety of risks and expenses involved, you will have to be as well-informed as possible.
An Independent Financial Advisor (IFA) will be able to look at your overall finances and help you decide if it is the best course of action for you. You can find a FCA authorised advisor in your area using our enquiry form, just fill in your details and someone will get in touch to discuss your options.