On face value an Equity Release sounds like a good idea however, before considering whether this is the right option for you, let us weigh up the pros and cons:

What is Equity Release?

If you are over 55, own your own home and are struggling for cash or would like to have a more comfortable retirement equity release may seem like a good idea but it is not for everyone.

Equity release is a way to unlock cash (the equity value) in your property, this can be done via a number of policies which “release” the equity (cash) you have tied up in your property.[1]

The money can either be taken in a lump sum or in smaller amounts over a period of time. The purpose of an equity release is that it will not be paid off until you die. It is common for those who do not have anyone to leave their assets to, to take out equity releases however, if you do have someone to inherit your assets this will leave less for them to inherit. [2]

Equity can be released in the following ways:

Lifetime Mortgage:

This is a type of loan which is secured against your property and is only available for those aged 55+. The amount you can release will depend on your age and property value. The benefits of this are that you will not have to move out of your home, and you will have no monthly repayments to make. The loan however will accrue interest over the years and is usually repaid through the sale of your property when you die or move into long term care which results in you having to sell the property to pay for your care fees.[3] The key point here is to be careful of the interest as this can soon mount up and end up being costly in the long run. For example, if you take out a Lifetime mortgage and should you end up in long term care which triggers the sale of the property to pay for your care fees, you will need to plan ahead an ensure there will be enough equity left in the property to pay for the same once paying off the lifetime mortgage and interest.

Home Reversion plan:

This is a form of equity release which allows you to access some of the cash (equity) tied up in your home. This is only available to those aged 60 or over.

A home reversion plan is where you will sell all or part of your home (depending on the amount of equity you have) to a provider in exchange for a cash lump sum, regular income, or both. The income option offers you regular payments for as long as you live which may seem like a good idea to have a regular cash flow, however, should you take out a home reversion plan and pass away shortly after, your beneficiaries will potentially lose a large sum of the money. [4]

This may appear to be a viable option as there are no monthly payments to make and no interest is payable on the money you receive however, you are technically selling all/part of your home to the company, they will get their proceeds once you sell your property whether this be upon your death or before. If your home increases in value, the home reversion company will make more money and this will result in you paying more to release the equity.

For example, If your home is worth £100,000.00 and you decide to sell all of your home to the home reversion company for a lump sum of £100,000.00. If you then need to go into long-term care some years later so need to sell your home, but this is now worth £125,000.00 in line with the market value. The home reversion company will get all this money, you will not get the extra £25,000.00 so effectively lose out.

Please note, you will still be liable to pay all other maintenance costs/bills associated with the property for example council tax and will be responsible for the upkeep of the same in order to protect the value of the property.

However, home reversion plans are considered high-risk products and for this reason, as with lifetime mortgages, you will need to seek legal and financial advice before you proceed.

Retirement interest-only mortgages (RIOs)

This is similar to a lifetime mortgage however, you MUST make monthly payments and are generally only available to those aged 55 and over, some lender may borrow to those aged between 50 and 55 at their discretion. Whilst RIOs are technically not a form of equity release, they are similar in that you can obtain a lump sum of cash secured against the value of your home and can even get one if you already have an existing mortgage. These can often be seen as a lifeline for an older borrower who requires some cash from the equity in their properties but do not qualify for a regular mortgage due to their age.

The meaning is in the name, you repay the interest on the loan every month, some lenders may allow you to repay capital too, but this is at their discretion. The key difference between an RIO and an equity release is that on an equity release the interest can roll over and be repaid at the end of the loan so there are no monthly repayments however, with an RIO you must make your monthly repayments.[5] Again, the amount you can borrow will depend on your age and the equity value of your property.

In 2018 the Financial Conduct Authority (FCA) re-categorised retirement interest-only mortgages out of the equity release sector and into the standard mortgage bracket. This means mainstream lenders could start offering retirement interest-only mortgages.[6]

Options for under 55’s

If you are under the age of 55 and are looking to free up some cash (equity) in your property, this could be achieved by way of a re-mortgage which can be done with the majority of high street lenders. Please note, if you re-mortgage your property, you will be required to make regular monthly repayments and your loan will be applicable to interest.

Please ensure you seek independent financial advice when considering any of the above.