Equity release: what you should know before you cash in

By Shane Shallow

Make sure you know the pros and cons before signing up for equity release.

Equity release, for homeowners aged over 55, can be a great way to take a tax-free, cash lump sum or an income from the equity (value) your property has built up over the years – without needing to move house or sell up. There are many reasons you might want this extra money: three of the most common are to fund everyday living costs due to a pension shortfall, to do home improvements or vital renovations, or to help out a family member financially. Usually, you have to be over 55 to sign up to an equity release scheme. ‘One thing to consider is that the older you are when you opt for one, the cheaper it’ll be overall as you’ll be carrying it for a shorter amount of time,’ says Tom Moloney, financial advice manager for the debt charity, Step Change (www.stepchange.org). Although there are definite benefits to equity release schemes, there are risks involved, too. There’s a lot to consider and understand before deciding on equity release, so it’s important to take financial and legal advice first. Read the following guide to decide if this is right for you…

Two types
There are two kinds of equity release: a lifetime mortgage (where you borrow money against your home) or a home reversion (where you sell a share in your home).

Lifetime mortgage:
This is the most popular type of equity release scheme. You still keep ownership of your home, but you take out a loan and get a cash lump sum or an income (or both) in return. This is also sometimes known as a ‘roll-up’ lifetime mortgage as you needn’t make monthly repayments – instead, the interest on your loan ‘rolls up’ and the debt (and interest) is repaid when the house is sold, which will be after you die or move into long-term care. If you don’t want a large lump sum straightaway but prefer to have cash to draw on when needed, a ‘drawdown’ lifetime mortgage might be more suitable. It means that you only have to pay interest on the funds which you’ve released – it’s a way to save money.

Home reversion:
These schemes involve a company or individual buying all, or part, of your home and giving you a lump sum or regular income in return. Although you still get to live in your home, you’re there as a tenant and don’t own it outright (if at all) any more. These types of schemes are less popular than lifetime mortgages.

The main things to consider
Examine your alternatives. Think about whether there’s any other way to access extra money:

  • Can your family help financially?
  • Have you any savings or assets?
  • Is there a spare room in your house to accommodate a lodger?
  • Are there extra state benefits you’re entitled to, but don’t claim for?
  • Could your local authority help to fund vital alterations to your property because of mobility issues?
  • Would it be better to downsize to a smaller, less expensive property?
  • Depending on your circumstances, would an unsecured personal loan or mortgage extension be better in the long run.

How much do you need?
Rather than think about how much money you can have, ask yourself how much you need. Consider the long-term consequences of borrowing too much money. ‘If you control the amount of money you take initially, you could be applicable for a more competitive equity release plan’, says Tom. ‘This keeps long-term flexibility and planning open, which you may need to access more funds further down the line for long-term care, or for more vital repairs to your home.’ According to Money Advice Service, www.moneyadviceservice.org.uk there may be a minimum amount you have to take; ‘This will depend on the scheme and provider and could be, say, £25,000, but you might not have to take it all at once.’

Cheapest isn’t always the best
It might be tempting to opt for the equity release scheme with the lowest interest rate, but look closer. ‘Future flexibility is important,’ says Tom. ‘Ask potential providers how they’d respond if you needed to borrow more money, or wanted to move house. Sometimes it’s good to trade off a bit of interest rate for some more flexibility down the line.’

Does your family know?
It’s worth bearing in mind that, as equity release reduces the value of your estate, it means your family inherits less from you when you die. It’s good to talk to loved ones who’ll be affected by your decision.

Get professional advice
It’s important to seek professional advice before opting for equity release. Companies who give advice on, or sell, equity release, are now regulated by the Financial Conduct Authority. ‘Don’t be afraid to speak to multiple advisers and get their thoughts on what you should do,’ says Tom. Take a family member with you if that’s possible.

Take your time deciding
An equity release scheme is a huge, long-term decision. That’s why it’s important to consider it in detail and not feel you’re being rushed.

‘It’s all been so simple’
Cath Kirby, 60, from Suffolk, took out an equity release scheme to enable her to do some house renovations

‘My sister had used an equity release scheme, and had been very pleased with it. I’d been thinking about doing the same for a long time, then I saw a TV ad for Key Retirement Solutions (www.keyrs.co.uk) and decided to look into it further. ‘Someone from the company visited me at home to talk it all through and he explained everything so simply, it was like I’d known him for years. He was very easy to work with. Before I went ahead, I told my two sons what I was planning. They said the decision was entirely up to me and were pleased I would have the money. ‘I opted for a Lifetime Mortgage equity release scheme and have used the money for new carpets on my stairs and in my bedroom, and bought a new front door and new windows. This year, I’m going to get my garden done, too. Having the money has been such a relief for me. It’s made me feel much happier in my retirement.’


What’s the lowdown?

We investigate the truth, including all the pros and cons

PROS:
Most people’s biggest asset is their home, so the big plus point of equity release is that you don’t have to sell your home or move out to access funds. Ultimately, equity release is designed to keep older people in their homes – and for most people it’d break their hearts to have to move. ‘Equity release used to be seen as a last resort, but it’s moving away from that’, says Tom Moloney of debt charity, Step Change. ‘Many equity release schemes are similar to interest-only mortgages; you borrow the money, and as long as you pay the interest every month, the amount you borrow doesn’t increase.’ They can be good from a long-term planning point of view, as the interest rate is fixed for the rest of your life rather than for a few years, as with a residential mortgage. Many people who release equity in their homes choose to give money to family and friends who need it. Being able to help a relative finance a new business, or grandchildren with university fees, can bring a great sense of joy.

CONS:
Bear in mind that releasing equity from your home can affect your finances in the future, including whether you’re eligible for means
-tested state benefits. As the government’s Money Advice Service points out: ‘Depending on which equity release scheme you go for, there is a risk of losing your home if you can’t pay the interest with a lifetime mortgage, and if you can’t pay the rent or break the terms of the lease with a home reversion.’ The cost can be high, meaning the estate you leave loved ones could be reduced. After 20 years, the cost of a lifetime mortgage may be nearly four times what you first borrowed. Plus, there are some home reversion plans that ask for over 70% of the value of your home and give just 20% to you as an advance.

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Picture: Shutterstock

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