If you’ve had a mortgage for decades, you’ve accumulated a significant amount of equity, sometimes several hundreds of thousands of pounds, in the home. If you need the cash, perhaps to cushion your retirement, to fund your in-home care, to help out family members, or to make improvements to the house, you can use a product called equity release to access the value tied up in your home, either as a tax-free lump sum or as a monthly income.
Equity release is available to people over the age of 55 who own their property outright. There are two options for equity release: lifetime mortgages and home reversion. Below, we’ll take a closer look at each and why you might want—or not want—to release equity from your home.
A lifetime mortgage is a loan you take out against the value of your property, while retaining ownership of it. Typically, the maximum amount you can withdraw is 60% of your property’s value, either as a lump sum or in smaller increments. However, the younger you are, the less equity will be available to you. For example, 65-year-olds can generally borrow 25% or 30% of their home’s value.
Additionally, the younger you are, and the longer you live, the more expensive the loan will be. This is because, with traditionally lifetime mortgages, you won’t make any repayments on the loan while you’re alive, so the amount owed will grow as the unpaid interest ‘rolls up’ (is added to your loan). This means the loan amount can escalate quickly. There are now some lifetime mortgage products on the market that allow you to pay off the interest over the term of the loan, however.
Interest rates on lifetime mortgages are either fixed for the lifetime of the loan or variable. If they’re variable, there will be a cap, or upper limit.
With a lifetime mortgage, you have the right to remain into your property until you die, provided it remains your main residence. The principal and the rolled up interest is paid back after your death or when you move into long-term care, via the sale of the property. You can ring fence a percentage of the property’s value for your heirs, however. Lifetime mortgages come with “no negative equity guarantees,” meaning that when the property is sold, if there isn’t enough to pay off the loan, after estate agents’ and solicitors’ fees have been deducted, neither you or your estate is liable for the remainder.
When you compare mortgages for equity release, read the terms closely to ensure your money, and rights to the home, will be protected.
Home Reversion Schemes
With a home reversion scheme, you sell all or a portion of your home to a provider, in exchange for a lump sum or regular income and then remain in your home as a tenant, although you pay no rent. When your home is sold, following your death or move into long-term care, the home reversion provider will pocket their share of the proceeds.
Typically, with a home reversion scheme you can access between 20% and 60% of the market value of your home—less than the full value were you to sell it. The percentage of its value you receive that may increase with certain providers as you get older or if you have certain health conditions. Most home reversion schemes are only be available to those over 65.
Is Equity Release A Good Idea?
Equity release can enable you to access the value you’ve built up in your property over decades, to fund your retirement or care. It can be an alternative to selling the property, giving you some of the financial benefits of downsizing without requiring you to move. Equity release schemes can also help you limit your liability for inheritance tax and with ring-fencing, still pass money onto your heirs.
However, you’ll no longer be the sole owner of your home and the plans can be inflexible if your situation changes. They may not be portable to another property, should you need to relocate, and you may require permission from your lender or provider to have anyone else, including a partner or carer, move into the home.
The amount of money you leave to your heirs will also be substantially reduced, as the provider will receive their share of the sale price of the home. You’re typically also required to keep the building in a good state of repair, to ensure your provider receives a return on their investment in it, and they may carry out maintenance checks to ensure you’re doing so.
If you’re considering using an equity release product, it’s important to seek out financial advice and to carefully compare all the products on the market.