When you’ve worked hard to become a home owner, you may want to consider how your home can work hard for you. Releasing the equity in your home could allow you to help your children get on the property ladder, make home improvements, go on your dream holiday, or simply to make the most of your retirement. It’s no wonder then that more than 93,400 homeowners borrowed a record £6.2 billion last year through equity release loans, according to data from the Equity Release Council.
There are of course pros and cons to equity release, and it’s not the best option for everyone. It’s important to understand how it works and the implications for your future, which is why we’ve put together this blog post to give you an overview.
What is equity release?
The term equity release refers to a range of products which allow those over 55 to access the cash tied up in their home, even if your mortgage isn’t fully paid off. The amount you are able to release is calculated based on how much your home is worth as well as your age. You can then choose whether to take the money you release as a lump sum or in a series of smaller amounts, or as a combination of the two. Equity release can help avoid the need for downsizing, as it allows you to live in your home for life, while providing you with the funds you need.
How does equity release work?
Lifetime mortgages are the most popular form of equity release, and allow you to borrow some of your home’s value at a fixed or capped interest rate. You can choose to take all of the money at once as a lump sum, or in smaller amounts as and when you need, known as drawdown. It’s generally best to borrow as late as you’re able to in order to accrue as little interest as possible, and by choosing the drawdown option, interest will only be charged on the funds you’ve already taken, rather than on the entire total you’re yet to draw down. Either way, interest will compound quickly, increasing the amount you owe and thereby decreasing the equity in your home. It’s therefore advisable to make repayments if possible, even if only to cover the interest if not the capital. Most lenders will allow you to do this, although there is usually a cap on the amount you can repay each year and there may also be a charge to do so.
Home reversion plans are the other main type of equity release, and involve the provider paying you a tax-free lump sum for a share of your home at below market value. You continue to live in your home until you pass away, then when the property is sold, the proceeds are split based on the percentage you and the lender own. This means that if your property value rises significantly, so does the amount the lender will get in the end. The fact that the lender pays less than market value for their share is due to their having to potentially wait a long time to get their money back, and since fluctuating property prices adds risk to their share too.
What are the benefits of equity release?
The main attraction to these products is that it allows you to stay in your home without having to make any financial sacrifices, downsize, or move area to release the funds you may need. It is still possible to move home though after taking equity release, so if you did want to downsize later you can. You don’t need to repay the loan until you move out of your home or pass away, however if you do want to repay some of it early, there are often flexible repayment options (although a charge may be incurred for this). The money you release is completely tax-free, and most lenders offer a no negative equity guarantee, meaning you’re not taking the risk of owing more than the value of your home when it’s sold.
What are the downsides to equity release?
It’s important to consider if equity release is right for you, and fully understand the product you choose, as if you get it wrong it can prove expensive. Interest is calculated daily and added to the amount you owe each month, which means that the total owed will quickly increase over time. This will reduce the equity left in your home, and the inheritance you leave will be reduced. It’s also worth noting that if you gift some of the released cash to family, they might have to pay Inheritance Tax on that in the future. Interest rates for lifetime mortgages tend to be higher than a regular mortgage, plus there are a number of fees to pay, including valuation and survey costs, as well as legal fees. It is important to consider that releasing equity may impact any entitlement you have to means-tested state benefits too. These products are only available to those over 55, but if you’re a homeowner and in need of funds, it is worth talking to your financial adviser about the possibility of remortgaging instead.
Is equity release the right choice for you?
It’s certainly well worth considering all of your options first, so think about whether downsizing could be the right choice for you. By selling your home and moving to a smaller one you’ll likely have a good sum in excess from the sale of the larger property. You may find that moving has other benefits, such as providing a more suitable home for any mobility issues you may have, reducing the amount of maintenance you need to think about, as well as lower energy bills. However, if your home is still the best place for you to live you may not want to move, and moving costs can also mount up.
If you’ve decided that staying in your home is the best choice for you, then the next step is to seek advice from a qualified equity release adviser, which is a requirement of the Financial Conduct Authority before taking out these products. A qualified advisor will compare equity release products from across the market and recommend the best deals for your circumstances and goals. It’s important to note that not all general financial advisers can advise on equity release, and must be specially qualified to do so. If you would also like to consider remortgaging as an option, it’s best to speak with a mortgage broker, and at WMG we have experienced advisers who can discuss both with you to ensure you’re given the best, most personally tailored options to choose from.
