The pros and cons of equity release

Your home isn’t just a source of comfort, security and familiarity. It can also be a valuable source of retirement income, thanks to equity release.

There are different types of equity release. With a lifetime mortgage you can take out a loan against your property. The loan, plus associated interest costs, is repaid when your home is sold. This might be after you die or move into permanent care.

A less-popular form of equity release is a home reversion plan. This involves selling a portion of your home to a company. Just like a lifetime mortgage, you get to stay in your home until you die or go into permanent care.

Those considering using equity release should consult a financial adviser and also consider whether downsizing is a better solution.

Exploring the idea of a lifetime mortgage? Try our equity release calculator and find out more about OneFamily Advice.

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Why is equity release so popular?

Given a surge in the number of baby boomers reaching retirement – Age UK research shows over 15.3 million British citizens are now aged 60 and above – it’s no surprise that equity release products are growing in popularity. Not only can they generate a reliable source of income while allowing you to maintain a comfortable lifestyle in your own home, they can also provide a one-off funding bump to perhaps pay off interest-only mortgages, pay for home improvements or even a dream holiday.

A growing number of parents are tapping into equity release to help their children onto the property ladder. They figure that offering a lump sum when they die, could come too late.

And the equity release market has grown up a lot in the past five years. Lending standards have improved and competition between providers has brought interest rates down. Products, though, still have their shortcomings. Equity release certainty isn’t for everyone.

Does equity release make sense for me?

Equity release isn’t usually suitable for property owners that have lots of spare cash. Or home owners with other investments like shares and bonds. Those assets can generate adequate income in their own right, lessening the need for a loan.

People wondering if they have enough to fund a comfortable retirement should consult a financial adviser, who can help evaluate if equity release is the right route.

Always talk to a qualified financial adviser when making these decisions. A professional will be able to help you understand whether equity release is right for you. Depending on your product and plan, equity release can be an expensive way to borrow.

 

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Could a lifetime mortgage wipe out my kids’ inheritance?

Be careful. Interest compounded over many years adds up. A rate of 5.5%, for example, compounded annually on a £100,000 lump sum would add interest costs over a ten-year period of around £71,000.

That could mean there’s not much value left in your home to pass on to loved ones. This could be exacerbated further if house prices stagnate or fall.

The good news is that reputable equity release products come with a “no negative equity guarantee”. That means, should house prices collapse or if the rolled-up interest is higher than the house price, your beneficiaries will never owe more than the value of the property.

There’s also an assortment of products to choose from that can help you reduce expenses. For example some allow you to repay 100% of the monthly interest on the loan for a period of your choice. It’s important to work with your financial adviser to find the right product and plan for your situation.

How can I keep those costs down?

People wanting to avoid interest costs entirely could opt for the route less-travelled: a home reversion plan. A downside here is that relatives won’t get to pocket any increase in the value of the portion of the home that was sold.

A more popular option is to select a lifetime mortgage with a ‘drawdown’ plan. In this instance, funds are released in regular bursts, perhaps monthly. Interest is only charged on the money that’s drawn down, shrinking the overall cost.

With lifetime mortgages, depending on the product, interest payments can also be made at regular intervals, rather than all coming in one big heap at the end. And customers willing to take the risk can opt for a variable interest rate product.

Some providers offer even more flexible solutions. Some providers may allow variable-rate customers to fix how much interest they pay in regular increments, buffering them should interest rates rise.

How will equity release affect my pension benefits?

Thankfully, for those over 65, state pensions aren’t affected. Some means tested benefits may be affected by equity release. However, this is dependent on your individual circumstances and the borrowing purpose. It’s crucial to take a close look at what kind of payments you’re receiving, or expect to receive, from the government.

Also consider how equity release could factor into your care plans if you are expecting to receive support.

Is staying at home better than downsizing?

An alternative way to raise funds from a property would be to simply sell and buy a cheaper home elsewhere. Then you can pocket the difference. Anyone thinking of downsizing to a flat, however, should be mindful that upkeep levies charged by property managers can run into thousands of pounds per quarter.

Homeowners should also think how much their own personal needs may change. Planning to stay in a home with lots of stairs, for instance, may prove unwise. Unless you can afford modifications to your home, such as the purchase of a stairlift.

You should also consider whether your current location gels with the kind of lifestyle you want in retirement. Are you close to family and friends? Are shops and entertainment precincts suitable for seniors nearby? If they are, then equity release might be for you.

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