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Equity release explained

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Equity release explained

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Last reviewed on 18th April 2021

If you’re over 55, it’s likely you’ll have equity tied up in your home. While equity release can help you to enjoy your retirement, it’s a risky option that requires careful consideration.

A cash lump sum can seem very attractive, but it’s important to research your options before making a commitment.

It’s also highly recommended that you seek professional financial advice from a qualified and reputable advisor. This is so you’re able to understand the risks before making a decision and don’t simply buy into the attractive deals on offer.

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What is equity release?

Equity release is a method used to access the capital value of your home and transform it into a cash lump sum. This is possible with a number of different product types and is for those aged over 55. Some policies are for those aged over 65, so you’ll need to check before applying.

Equity can be released in the following ways:

  • A large single lump sum
  • Multiple smaller sums which may include interest
  • A combination of large and small sums

It’s important to note that you can apply even if you still have a mortgage on your property.

Equity release is not the same as a remortgage to release equity. Although some principles are similar, they are not to be confused. This can be ideal if you’re not quite 55, but wish to release some equity from your home.

Read more: How to remortgage to release equity

How does equity release work?

The most popular form of equity release is a mortgage that is only repaid on death, usually by selling your home. This can be useful for when you’d rather access the wealth in your home, instead of leaving your home to a loved one when you die.

Equity release policies typically fall into one of two mortgage types.

  • Lifetime mortgages
  • Home reversion plans

What is a lifetime mortgage?

For those aged over 55, a lifetime mortgage is the most popular option for equity release.

Key features include:

  • Borrow capital that’s tied up in your home
  • Repay the capital plus interest upon death
  • The mortgage is repaid by selling your home
  • Drawdown policies allow you to repay earlier
  • Options to take large lump sums or smaller, monthly amounts

Read all about lifetime mortgages here.

Home reversion plans

Home reversion plans are only available to those aged over 65.

Key features include:

  • Receive a single lump sum for part of your home
  • Continue to live in your home rent-free until you die
  • Proceeds are split on the percentage you and your lender own
  • You initially sell a share to your lender for less than what it’s worth
  • Lenders are then paid their share upon the sale of your property

Lenders for home reversion plans vary and the percentage you sell will also be negotiated. The reason lenders often pay less than the market value of your home is that they’ll have to wait until they receive any funds back from the loan. That being said, you’re essentially selling a share of your home, so it isn’t something to overlook.

ask a mortgage broker

Is equity release expensive?

Equity release can be an expensive way to enjoy the wealth tied up in your home. Lifetime mortgage rates start at around 3%, with average rates around 5%. In comparison to regular mortgages, equity release can be more expensive.

As you won’t be repaying the loan until death, the interest continues to compound each month. This is the main reason why equity release can often be so expensive. With a regular mortgage, your balance is reduced each month as you’re making monthly payments towards the balance.

Fees for equity release can also be expensive. It’s not unusual for product fees to start from £1000 and can go up to £5000 depending on the policy and lender you’ve chosen. This can include fees for surveyors, application fees and legal fees.

Why is equity release considered high risk?

Equity release for the over 55s is considered an expensive way to enjoy the capital in your home. That said, it can make sense under the right circumstances.

You can also minimise your risk if you manage your policy in the following way:

  • Speak to an impartial and qualified expert
  • Don’t borrow more than you need
  • Only use a reputable registered company
  • Check if releasing equity will affect your other finances

Speak to an impartial expert

Don’t simply speak to a sales rep that works for an equity release provider. Speak to an advisor that is impartial and can give you honest and unbiased financial advice.

Advisors that are independent and aren’t tied to lenders, can assess alternatives and other deals that may be more suitable. There are a number of mortgage options for those aged over 55.

Read more about mortgages for over 55s here.

Don’t borrow more than you need

Borrowing a large amount early on can result in huge compounded interest amounts. This is why it’s highly recommended to only borrow the amount you need. Remember, you can always release more equity at a later date if needed.

Releasing a large lump sum and then having the funds sit in the back for years to come will only create a huge interest deficit on your loan.

Members of the Equity Release Council

Ensure your providers are members of the Equity Release Council. This is because you’ll have a no negative equity guarantee. This means that your debt will never exceed your home’s value.

Even if your home falls in value, you’re protected, but it still makes sense to check the small print and terms of your policy. The equity release providers on our panel are all members of the Equity Release Council.

Will equity release affect your other finances?

Receiving a large lump sum can impact your financial profile as a whole. For instance, if you’re in receipt of certain benefits or pension credits, you could lose some of your entitlement.

Your advisor can check your financial profile for you, to ensure your decision is viable. The last thing you’d want to do, is to commit to an equity release policy, only to realise it’s going to affect the income you receive elsewhere.

Alternatives to equity release

If you have equity in your home, there are other alternatives to equity release.

A remortgage can allow you to withdraw some capital from your home. That said, you will have an increased mortgage each month as a result. In comparison, it’s likely you’d have no monthly payments with an equity release mortgage.

Downsizing can also be a great alternative. You can sell your property and buy something smaller. This should enable you to buy your new home without a mortgage and provide you with excess capital for your retirement.

Our advisors can assess your situation in more detail to give you further options. Having equity in your home puts you in a really strong financial position with lots of options. Speak to an expert before making a commitment.

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About the author

Mortgage Advisor | More Articles

Martin is a senior mortgage advisor and has held a CeMAP qualification for over 15 years while also completing an MBA in Global Banking & Finance.