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? One solution is to equity-release – something more than 25,000 households did in 2023. However, equity release has long-term implications for your home and is an expensive way to raise cash. This guide runs you through the key points to consider.

Already equity released? We've got a separate guide on weighing up the costs of switching equity release deal, and whether changing deal could help you save £10,000s.

Always consider downsizing first

1888675213

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.

If you decide in the end that downsizing isn't the right option for you, equity release might be a suitable alternative.

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 2023, more than £2.6 billion of property wealth was turned into cash via equity release.

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.

The products available to free up cash fall in to three different camps:

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 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+

A less popular option than lifetime mortgages, 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?

251888530

Interest rates on lifetime mortgages currently start from around 5.5%, with the more costly deals nearer to 8%. This is significantly more expensive than the top rates on mainstream residential mortgages. 

When weighing up which equity release product would suit you best, remember that the expensive 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% 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.

Spotted out of date info/broken links? Email: brokenlink@moneysavingexpert.com