Equity release: How to release equity from your home
Equity release is a way to free up cash from your home but there are pros and cons you need to be aware of before going ahead.
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If you need cash to spend and you’re 55 or over and a homeowner, taking out an equity release product is one option to consider.
It lets you release the wealth you’ve built up in your property without selling your home to give you tax-free cash to spend on things like home renovations, necessary adaptations to your property, helping your children get onto the property ladder or going on holiday. However, there are risks as well as benefits so you should explore alternatives first.
This is effectively a loan against the value of your home that you don’t have to pay off until you die or go into long-term care (or both you and your partner do if you own the property jointly) so there are no monthly repayments. You can either access the money as a lump sum or access a smaller amount with the option to take more later. You’ll only pay interest on the amount you’ve actually borrowed.
The interest ‘rolls up’ over the period of the loan – every year interest is calculated on the original loan amount plus any interest already added and the amount you owe continues to increase until the time comes to pay it off, usually from the sale of your home. Interest rates are generally higher than for standard mortgages and are mostly fixed.
With some lifetime mortgages you can make partial repayments of the loan or regular interest payments to reduce the amount you owe at the end.
They are available from the age of 55 upwards. Learn more about lifetime mortgages.
Home reversion plan
With a home reversion plan, or ‘reverse mortgage’, you sell a share of your home or all of it to an equity release provider in return for a lump sum or regular payment. You may also be able to take the money in stages. You continue to live in your home rent-free under a lease until you die or move into long-term care and insure and maintain it as before.
The amount you receive will be lower than the market value – usually between 25% and 60% depending on your age and health. The older you are when you take out the plan, the higher the percentage you’ll get.
Home reversion plans are usually only available to people aged 65 or older. Learn more about home reversion plans.
Both have their pros and cons, which is why it’s important to talk through your situation with an independent financial advisor.
Generally speaking, with lifetime mortgages you will always know the exact rate. Home reversion plans on the other hand are usually the better option if property prices stay flatter, but worse if they rise.
What percentage can you borrow with equity release?
With a lifetime mortgage, the older you are the higher the proportion of your property’s value you can borrow. You may be able to borrow up to 30% at age 55 or up to 60% if you’re older.
If you’re taking out a home reversion plan, you can sell up to 100% of your property but the percentage of the market value you’ll get for it depends on your age. You could get just 25% if you’re 65 for example or up to 60% if you’re 90.
What are the risks
There can be significant downsides to taking out equity release and it can be an expensive way to borrow so you should always get independent financial advice from an adviser regulated by the Financial Conduct Authority (FCA) before going ahead to make sure it’s right for you. All firms selling equity release must offer you advice.
With a lifetime mortgage, the amount you owe can quickly grow, potentially to more than your home is worth by the time it comes to pay it off. You should look for one with a no-negative-equity guarantee to make sure this doesn’t happen. All equity release providers that are members of the Equity Release Council – the trade body representing them – must have this on their products.
With a home reversion plan, you no longer own all of your home and you won’t benefit from any increases in house prices on the share you don’t own.
Equity release can affect your tax status and entitlement to benefits and the amount that will be left to pass on as an inheritance when your property is sold will be reduced, although some lifetime mortgages let you secure a proportion of its value to leave as an inheritance. With home reversion, if you don’t sell all of your property you can be sure there will be a share left over.
Lifetime mortgages have hefty early repayment charges if you want to pay the loan back in full, although many providers now only charge them for a limited period. With a home reversion plan you may be able to buy back the share you sold but this will be at the full market value.
Products from members of the Equity Release Council must allow you to move home with them (according to certain criteria).
Alternatives to equity release
Other ways to access cash include downsizing to a smaller home, taking out an unsecured loan, extending your mortgage term if you haven’t reached your lender’s maximum age and taking out a retirement interest-only mortgage. If you need the money to carry out adaptations to your home you may be able to get a local authority grant. Learn more about the alternatives to equity release.
Equity release tips
- Always get independent financial advice before taking out equity release.
- Consider alternatives first.
- If equity release is your only or best option, delay doing it for as long as possible.
- Always choose a provider that is a member of the Equity Release Council.
Selling your property
Downsizing essentially means selling your property, using your equity to buy a cheaper property and then cashing in on what’s left over once all costs are covered. The new property is then yours to do what you want with and it can be left for your family to inherit when you pass away.
However, it’s important to consider the following:
Cost of moving
Moving can often cost more than people think. A portion of the money you get from selling will need to be allocated to estate agent fees, legal fees, stamp duty and moving costs, which when added up can be quite substantial.
If you’ve lived in your home for some time, packing up and leaving your memories behind might be too overwhelming and stressful. It’s important to give yourself plenty of time to consider what’s best for you.
Borrowing more through remortgaging
You could raise the lump sum of cash you need by remortgaging, where you’re essentially borrowing against the value of your equity.
If the value of your home has gone up significantly since you bought it, accessing some of the value and then looking for a better mortgage rate could be an option, particularly if you have a good regular income.
Yet, before you remortgage for extra cash, think carefully about two key factors:
Make sure you’re happy with the size of your new mortgage repayments as your home may be repossessed if you don’t keep up with them. It’s also good to consider what fees are involved if you did want to exit your existing mortgage agreement.
You will need to go through the standard mortgage application process and if you’re approaching retirement, you may find that lenders are less likely to lend to you, or offer you a mortgage on a restricted term instead.
Equity release lets you access cash to spend however you like without selling your home but there are risks so you need to think carefully before going ahead.
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