Article written by Mortgage Advice Bureau Later Life, our preferred equity release partner. This article is not intended to be financial advice to any individual. The views expressed are those of the author and Moneyfactscompare.co.uk does not endorse the content.
If you’ve paid off most or all of your mortgage, then your home will be packed with equity - the market value of your home minus any secured debt you haven’t yet paid off. In essence, equity would be the sum you’d walk away with if you were to sell your home for cash.
Having access to a percentage of the equity in your home as a lump sum in retirement could be very helpful, but what are your options if you don’t want to sell your home? This is where equity release could come in.
What is equity release?
Equity release is essentially a financial arrangement that enables homeowners to access some of the accumulated equity in their homes. It’s available to homeowners aged 55 or over, and while there are a few financial options available to you in retirement, a lifetime mortgage is the most popular form of equity release.
The amount you can release will depend on the value of the property and the age of the homeowners. If you have an existing mortgage on the property, this will need to be repaid in full. You can use the proceeds of your lifetime mortgage for this.
What is a lifetime mortgage?
A lifetime mortgage is a loan secured against your home, which allows you to borrow money against the value of your property. This means you don’t have to sell your property or move out. The loan is typically repaid when you or the last applicant passes away or moves into long-term care. At this point, your home will usually be sold. The proceeds are then used to repay the lender, with anything left over going to your estate.
Interest on this loan is usually rolled up or compounded and added to the final outstanding balance, which does mean that the loan amount and the interest accrued will increase over time. However, lifetime mortgages that meet the Equity Release Council’s standards come with a no-negative equity guarantee, meaning you’ll never owe more than your home is worth, and you will not pass on any equity release debt to your family.
Secondly, your interest rate is fixed, which shelters you from market volatility.
The pros of equity release
Equity release can offer several potential benefits for those in the later stages of their life. Firstly, it can provide access to a sum of tax-free cash, which you can use to help boost your retirement finances. This is one option for those who have limited savings or pension funds. You can also use the money to pay off existing debts, make home improvements or gift to children or grandchildren.
Additionally, since equity release allows you to remain in your home, you don’t need to consider moving and giving up a place that potentially has cherished memories attached to it.
There’s no need to make monthly payments with equity release, as the loan and roll up interest will typically be repaid when the plan comes to an end and the property is sold. You can still make the decision to contribute ad-hoc, partial capital or regular interest payments, which means you can manage the size of your loan as needed.
This comes with a certain level of peace of mind, especially for those who are concerned about meeting other monthly payments in retirement. Quality of life in retirement is important, and equity release could help you achieve that.
It is, however, important to carefully consider the potential drawbacks of equity release and seek advice from a specialist equity release adviser before making any final decisions.
The downsides of equity release
While equity release comes with certain advantages, you should always think carefully before securing a loan against your home. There are a few things to take into consideration when deciding if it’s the right option for you and your circumstances. One of the primary downsides is that interest rates on lifetime mortgages can be higher than those on standard mortgages and personal loans.
Releasing equity from your home will also reduce the amount of inheritance left over for family and beneficiaries. This can be a challenging decision to make, especially if you had hoped to pass on your property to your children or grandchildren. While you won’t leave your family in debt because of your equity release, there may be less value left in the property overall. You could get inheritance protection on some plans, which allows you to separate and protect a portion of your home’s future value.
Finally, equity release can diminish your eligibility for certain means-tested benefits, including Pension Credit and Council Tax Reduction.
Is equity release right for you?
Deciding whether equity release is the right option for you will depend on several factors, including your age, personal goals, and financial situation. For example, if you’re over the age of 55 and own your home worth at least £70,000, but have limited income or savings, then equity release may be a solution.
Before making any decisions, carefully consider the pros and cons, and weigh your options. As we noted, using equity release can diminish your family’s inheritance, which may not be something you want to accept .
You could start to think about your options by answering a few simple questions:
- Will your savings or other sources of income be enough to sustain you in retirement?
- Do you want to downsize?
- Are you worried about reducing the inheritance for your beneficiaries?
- Are you free from interest-only mortgages or other existing debts?
- Has a financial adviser told you a lifetime mortgage is not right for you?
If you answered 'no' to any of the questions above, then it might be worth talking to an equity release adviser. When it comes to equity release, you are required to speak to an adviser, but you can ensure that the advice they provide is tailored to your unique circumstances.
Downsizing as an alternative
While downsizing is a common option in retirement and has its advantages, it’s not always the right option for some.
If you do choose to downsize, you could find a cheaper home and pocket the difference from the sale. You could also potentially save money on maintenance, running costs and Council Tax. While it can’t necessarily fund your retirement entirely, it could supplement your income. There are, however, costs involved with moving house, and the process can be stressful.
Check out what Mortgage Advice Bureau has to offer in terms of advice for moving home.
Retirement interest-only mortgages (RIOs) as an alternative
Retirement interest-only mortgages (RIOs) are similar to a lifetime mortgage, but with one key difference. A lifetime mortgage usually has no monthly repayments, but with a RIO you will borrow a lump sum and then make monthly payments to pay off only the interest on the loan.
This means when your home is eventually sold, the amount that needs to be repaid will be the same as the amount you initially borrowed.
In both instances, it’s best to speak to a mortgage broker and work out the right option for you.
A mortgage is a loan secured against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.
How an expert can help
An equity release adviser can help you understand the costs and benefits of different equity release products, working out whether something is going to suit your individual needs both now and for the future.
While you do have to seek out professional advice before releasing equity, you can make the decision to work with someone who really understands your needs and wants, which will take time to understand. This way you can make a well-informed choice that is going to suit your circumstances.
Equity release can offer homeowners over the age of 55 access to potentially life changing tax-free cash, but it’s important to acknowledge that it isn’t the right solution for everyone.
Before making any decisions, seek professional advice from someone who is experienced in equity release products. If you find that equity release doesn’t suit you, there are plenty of options out there that may be closer to what you need, and Mortgage Advice Bureau has a suite of advisers on hand to help you with any of your mortgage needs.
Deciding whether equity release is right for you is a personal decision and requires careful consideration. Get in touch with an adviser at Mortgage Advice Bureau Later Life today to discuss your options. They will help you weigh up your current and long-term goals and ensure it’s the right decision for you.
