Equity release is a financial product that is used by homeowners as a way to access cash tied up in their property for other purposes.
It’s essentially a form of mortgage, but with slightly higher interest rates, which is especially useful for people who are asset rich but cash poor, as it provides an opportunity to draw on the value of their home and access some of their wealth more easily.
Equity release schemes work by loaning you a lump sum based on the value of your home. You can also choose to receive your loan in several equal, smaller payments or request to access your equity cash in a combination of larger and smaller payments, depending on what works best for you and your own financial situation.
There are two main different forms of equity release loans, both of which work slightly differently. Which of these is best for you will typically depend on your financial situation and how you want to release money from your home.
Discover how to access cash in your home and get the money you need, with our guide to equity release. Find out how equity release works and whether it could be a good idea for you.
Who is eligible for equity release?
To be eligible for equity release, you must be over 55 and own your own home. Ideally, you'll have no mortgage at all, but some lenders will still provide equity release if you have an amount of money left to pay off on your mortgage. It's also important to note that you're not eligible for equity release if your home is part of a retirement complex.
What are the different equity release schemes, and how do they work?
There are two main forms of equity release products and it’s important to know what these are so you can make the best decision for your circumstances.
Lifetime mortgages
A lifetime mortgage allows you to borrow some of your home's value at a fixed or capped interest rate.
The main defining factor of a lifetime mortgage is that the money you release from your home is not usually repaid monthly. Instead, the funds you owe are recouped later from the sale of your home after you die or go into long term care. However some lifetime mortgages now allow the option to pay back some or all of the interest and some both the interest and capital.
Home reversion plans
The other type of equity release is known as home reversion. This product allows you to sell some or all of your home to the lender, either in part or full, in exchange for a tax-free cash sum. Once your home has been sold, you are given a lifetime lease to your house, meaning you’ll be able to live there rent-free for the rest of your life.
The lender recoups the amount of money you owe by selling the house after your death or go into long term care.
The minimum age requirement for this product tends to be 65.
Is equity release a good idea?
Equity release won’t necessarily be a good idea for everyone, but for some people, it can be an effective way to unlock cash they have tied up in their property. Whether or not it’s the right tactic for you will depend on your plans for your cash and your financial situation.
Equity release schemes can be used to fund grand plans for your retirement. It could be that you want to go travelling, make some big home improvements or provide for your loved ones with a financial gift to help them take the next step in their own lives.
People who haven't had a workplace pension or haven't accumulated considerable savings could also benefit from using equity release to live more comfortably during retirement.
Before deciding, it’s also worthwhile to check whether equity release will affect your council tax benefits or pension credit. If your benefits don't add up to more than the amount you could borrow, then equity release is worth exploring.
If your property has increased in value over time, equity release can also be a good way of putting this increase to use without having to move home.
Essentially, whether equity release is worth it or not depends entirely on your circumstances and plans. If you're financially secure but need extra cash to live more comfortably, then equity release could be the right option for you.
Is equity release safe?
If you're otherwise financially healthy and secure, then equity release is a safe way to free up some cash.
However, it’s still important to make sure you understand the interest rates and how the equity release loan may impact your future finances. For example, it may mean your loved ones inherit less when you pass away, or it might reduce your state benefits. Double-check the impact of equity release with a broker before you decide, to ensure you're making the right financial decision.
It's also important to note that the interest rates for an equity release loan tend to be higher than a typical mortgage. With no monthly repayments required, it's easy for the interest to build up quickly. However, your repayments should be capped or provided at a fixed rate, so you'll always know how much you're likely to owe over time.
The Financial Conduct Authority (FCA) regulates all equity release products to ensure they're provided lawfully and responsibly. Most providers are also members of the Equity Release Council (ERC), which is in charge of setting standards for equity release schemes. Members of the ERC will typically have a no negative equity guarantee. This means that if the money from the sale of your home doesn't cover the total of your debt, neither you nor your estate are liable to pay any extra to the lender.
If you're coming up to retirement and would like to free up some cash, we can put you in touch with one of our expert providers. They will work with you to help you decide whether equity release schemes are a good idea for you.
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