Should you equity-release?
Release money from your home while still living there
Over 55, struggling for cash (or just want a more comfortable retirement), but own your own home? The easy solution, according to the adverts at least, is to equity release. While rates are the cheapest they've been in years, equity release itself is still an expensive and risky way to raise cash. So I'll quickly run you through the key points you need to consider.
In this guide
Warning. Equity release ISN'T an easy answer to fast cash in the coronavirus crisis. We keep hearing from people looking at releasing equity from their homes to get them over the current financial hump/hurdle/mountain. Please be careful. It's often expensive and has long-term risks. We're not saying it's always wrong, just don't rush in, it needs careful consideration and choice.
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. Our Selling your property guide has info and tips on selling your home.
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.
What is equity release?
Equity release is, in a nutshell, a way to unlock the value of your property and turn it into a cash lump sum. 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 take the money you release in one lump sum, in several smaller amounts on which you'll pay interest, or as a combination of both.
Yet make sure you do it in the right way as if you get it wrong, it can prove expensive, as these tweets show:
How does equity release work?
The most common form 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. Equity release products fall into two main camps:
1. Lifetime mortgage
This is the most popular and for those aged 55+.
Here you borrow some of your home's value at a fixed or capped interest rate (see below for more). With old-style lump-sum lifetime mortgages you don't make repayments, so the interest compounds rapidly as the amount you owe is increasing all the time – in contrast to a normal mortgage.
Some 'drawdown' versions do allow you to pay back the interest (some even allow you to pay back some of the capital as well) so you can reduce the overall cost. With this type, you can take money out of your property a bit at a time up to an agreed amount – with interest charged on the amount you take, rather than the whole amount available.
A lifetime mortgage is different from a standard mortgage – if this is what you're looking for, check our Cheap Mortgages guide for tips.
2. Home reversion plan
You need to be aged 65+.
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 £200,000 property in return for a lump sum of £40,000, this cash you receive is at a huge discount to the £80,000 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 £300,000, the provider would then be entitled to £120,000 – 40% of the proceeds.
Therefore with lifetime mortgages you know the exact rate, while as a generalisation home reversion plans are better if property prices stay flatter, worse if they rise substantially.
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 in more pressing need, it's worth speaking to a mortgage broker about the possibility of remortgaging, or even contacting a financial adviser if your situation is particularly complicated. Remortgaging could help lower the amount you pay towards your mortgage each month, and in some cases you might even be able to raise further cash against your property.
It's worth noting that in recent months some mortgage lenders have increased their upper age limit when it comes to borrowing – not surprising when you consider people are typically living and working for longer. This means that those in middle age shouldn't just assume they won't be accepted for a remortgage (or even a brand new mortgage) simply because of their age.
How much does equity release cost?
For the lifetime mortgage equity release the typical rate is about 5%, although some rates are under 3%. This is cheaper than rates have been for a number of years – yet still significantly higher than those for most standard mortgages.
The eye-watering price-tag your estate would have to repay comes if you're not making monthly repayments to reduce the debt, so the interest compounds and compounds.
For example, borrow £20,000 aged 60 at 5.1% on a £120,000 home, and the amount you owe doubles roughly every 14 years. So live until 74 and you owe around £40,000, live until 88 and you owe £80,000.
As well as the actual cost of the interest, you'll have to pay arrangement fees. These can typically tally £1,500-£3,000 in total, depending on the type of plan being arranged. They can include such costs as application fees, fees for legal work and surveyor fees.
Four equity release tips
If you've read the above and you're sure equity release is right for you, here are a few tips:
1. Don't borrow the full amount 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. Ensure you use a company that's a member of the Equity Release Council. This trade body's members must promise a 'no negative equity' guarantee, so your estate will never owe more than your home is worth.
3. Get advice before you do it. Speak to an independent mortgage broker or financial adviser with an equity release qualification to find the best deal. You can find one at Unbiased.co.uk, VouchedFor or the Equity Release Council.
4. It 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 first.