Should you equity-release?
It involves releasing money from your home while you're still living there
Over 55, own your own home, but struggling for cash/want a more comfortable retirement? The easy solution, according to the adverts at least, is to equity-release – something that 100,000s of households have done. However, equity release is a risky and – with interest rates at their highest in years – particularly expensive way to raise cash. In this guide I'll run you through the key points you need to consider.
Always consider downsizing first
Wondering whether equity release is a good idea? It certainly isn't something to be taken on lightly, so before you dive right in, first evaluate whether downsizing your property could be an option.
If you can sell up and move on to a smaller home, and live off the excess cash you have made, great. You may also find a property more suitable as you age – fewer stairs, perhaps, or maybe none at all. Our Selling your home guide has full info and tips on what's involved when selling a property.
If downsizing is right for you, don't put it off.
People in their 60s often say to me: "I'll do it in a few years."
A few years later it's: "Not yet."
And after that it's: "We're now too old to leave."
So if downsizing is right for you, consider doing it sooner. Having said that, if it's a home where you've lived for years and you have many friends in the community, don't underestimate the personal and social impact of moving away if you can only afford to downsize out of the area.
On top of this, the financial costs can be high, with agent fees and removal costs to factor in – so you'll still need money to finance this option initially. Have a read of our Moving home checklist guide for more information on what moving property will likely involve.
What is equity release and how does it work?
Equity release is a way to unlock the value of your property and turn it into cash. You can do this via a number of policies which let you access – or 'release' – the equity (cash) tied up in your home, if you're 55+. You don't need to have fully paid off your mortgage to do this.
As a rule, you can either take the money you release in one lump sum, or in smaller amounts over time (known as drawdown), or a combination of both. In 2022, more than £6.2 billion of property wealth was turned into cash via equity release – double the equivalent amount in 2017.
Yet make sure you equity release it in the right way, as if you get it wrong, it can prove expensive, as these tweets show:
The most common form of equity release is a mortgage that isn't paid off until you die. So if you have no one to leave your assets to, it's a decent, though expensive, route to raise cash.
If you do have people to pass assets to, equity release generally means there will be less for them to inherit. Then again, it is your money, so prioritise your own standard of living.
1. Lifetime mortgages – for those aged 55+
This is the most popular form of equity release. Here you borrow some of your home's value at a fixed or capped interest rate.
You can either take the money all at once in a lump sum, or you can take it in smaller chunks as and when you need it – something known as drawdown. If you choose the drawdown option, interest will only be charged on the cash you've actually taken, and not on the money you're yet to draw down.
With both forms of lifetime mortgage, if you don't make any repayments then the interest will compound rapidly, as the amount you owe is increasing all the time. These days however, most lifetime mortgages do allow you to make repayments, be that repayment of the capital or just the interest, meaning you can reduce the overall cost. Typically there'll be a cap on the amount you can overpay by, normally 10% of the loan value each year.
A lifetime mortgage is different from a standard mortgage. If this is what you're looking for, check out our Cheap mortgage finding guide for tips.
2. Home reversion plans – for those aged 60+
Here a provider pays you a tax-free lump sum for a portion of your home at below market value. You can then live in the property (rent-free) until you die. When it's sold, the proceeds are split based on the percentage you own and the lender owns. So if your property value rises significantly, so does the amount it gets.
For example, if you sell a 40% share in a £400,000 property in return for a lump sum of £80,000, this cash you receive is at a huge discount to the £160,000 this share is actually worth (at current market prices) – mainly because the provider will have to wait many years to get its money back. Years later, when you die, if your home is eventually sold for £500,000, the provider would then be entitled to £200,000, which is equivalent to 40% of the sale proceeds.
So home reversion plans are better if property prices stay flatter, and worse if they rise substantially.
3. Retirement interest-only mortgages (RIOs) – similar to lifetime mortgages but you MUST make monthly payments
While RIOs technically aren't a form of equity release, they're similar in that they give you a lump sum of cash secured against the value of your home. Provided you've a stable monthly income, they can be a good way of releasing equity in a home — and you can get one even if you've got an existing mortgage.
Like a lifetime mortgage, RIOs are generally only available to over-55s, and you'll be charged interest on what you borrow. But unlike a lifetime mortgage, where repaying the interest is normally optional, with a RIO you MUST pay off the interest each month (you can usually choose to make overpayments too).
Provided you can afford the repayments, a RIO will work out cheaper than a lifetime mortgage as you're paying off the interest each month – so interest is only ever being charged on your original loan amount. Whereas with a lifetime mortgage, the interest compounds each month (unless you choose to pay it off each month, in which case it'd be no more expensive than a RIO).
Because you have to make repayments with a RIO, you'll need to pass affordability tests to get one. RIOs can also be used to replace an existing mortgage, such as standard interest-only mortgages. The amount you can borrow is normally dependent on your age, property type, and what kind of RIO you’re applying for. How much you can borrow is typically capped at around 60% loan-to-value (LTV) – but this applies to lifetime mortgages too.
While RIOs can come with the option to port (which allows you to take the mortgage with you to another property), they don't have downsizing protection (unlike many lifetime mortgages). So you're not protected from early repayment charges if the property you're moving to isn’t acceptable to the lender.
What are my options if I'm under 55?
Equity release is only available to those aged 55 and over. If you're close to 55, you may feel like you're in a position where you can wait until then. However, if you're a homeowner who's under 55 and in more pressing need, it's worth speaking to a mortgage broker about the possibility of remortgaging, or contacting a financial adviser if your situation is particularly complicated.
Remortgaging is a good way of lowering what you pay towards your mortgage each month, and in some cases you might be able to raise further cash against your property. In recent years, several mortgage lenders have increased their upper age limits when it comes to who is able to apply for a mortgage – so if you're an older homeowner but not interested in equity releasing, don't automatically assume you wouldn't be eligible for a mortgage.
How much does equity release cost?
Interest rates on lifetime mortgages currently start from around 6%, with the more costly deals nearer to 8%. This is more expensive than the top rates on normal residential mortgages. And just because a deal has a lower interest rate, this doesn't always mean it's the best deal.
When weighing up which equity release product would suit you best, remember that the eye-watering price-tag your estate would have to repay comes if you've chosen not to make monthly repayments to reduce the debt, so the interest compounds and compounds.
For example, borrow £20,000 aged 60 at 6% on a £250,000 home, and the amount you owe doubles roughly every 12 years. So live until 72 and you owe around £40,000, live until 84 and you owe £80,000.
As well as the actual cost of the interest, you'll have to pay a number of fees. This will likely set you back between £1,500 and £3,000, depending on the type of plan being arranged, and will include arrangement & valuation costs, as well as fees for legal work and a surveyor.
Quick equity release tips and pitfalls to be aware of
If you've read all the above and think equity release could be right for you, make sure you have a read of these quick tips before doing anything:
1. Don't borrow all you need in one go
The sooner you borrow, the more expensive it is, as the interest has longer to compound. So borrow as little as you need now, and wait as long as you can to do it again.
For example, if you think you may need £40,000 from your home to cover 20 years, only take what you need now and wait to take more until needed. Drawdown lifetime mortgages are set up to make this easier.
2. You'll need professional advice BEFORE you equity release
Before applying for a lifetime mortgage or home reversion plan, you'll first need to seek advice from a qualified equity release adviser. This is a requirement of the Financial Conduct Authority.
A qualified advisor will be able to compare equity release deals from across the market. This means you'll get the best advice and be recommended products tailored to your circumstances. You should consider using an adviser that's a member of the Equity Release Council (more on the Equity Release Council below). Before selecting an adviser, ask:
- Do you offer a free consultation? It won't necessarily, but it's worth asking.
- Do you charge a fee? If so, how much? Typically advisor fees will set you back between £1,000 and £2,000, though there are some that don't charge a fee at all.
- Are you whole-of-market / can you access equity release deals from all lenders? You want a 'yes' answer. There are some advisors who are tied to a limited panel of lenders, or even tied to a specific lender.
Do note that most general financial advisers can't advise on equity release, unless they are qualified to do so.
If you think that remortgaging is a better option, it's best to speak with a mortgage broker – though do note that general mortgage brokers won't be able to advise on equity release. Similarly, speak to a mortgage broker if you're considering a retirement interest-only mortgage (be aware that not all brokers advise on RIOs, so it's best to ask up front before booking an appointment).
3. If you do opt for equity release, make sure it's from a provider approved by the Equity Release Council
The Equity Release Council (ERC) is a body that exists to ensure lenders and advisers provide the highest possible standards to borrowers.
Lenders who are members of the ERC and carry its TrustMark (seen on the right) must abide by certain rules and regulations, such as the 'no negative equity' guarantee, which means your estate will never owe more than your home is worth. So if you're seriously considering a lifetime mortgage or home reversion plan, make sure it's one from a lender that's an ERC member (virtually all equity release lenders are).
If it is, you'll also need to arrange for legal advice from a solicitor, whose job is to ensure you understand the ins, outs and implications of equity release. One of these meetings with your solicitor will have to be face-to-face.
As well as lenders, both solicitors and financial advisers can also be members of the ERC. To find one that's a member of the ERC, see the relevant section of its website:
4. Be aware that equity releasing can affect your benefits
Having cash rather than a property can affect the benefits you're entitled to, for example, pension credit, universal credit and others. So if you're entitled to those, check the impact of equity releasing first. If you're unsure, ask an equity release adviser to check what the impact would be.
Clever ways to calculate your finances