Equity release allows you to release cash in a loan secured against the value of your home.
Equity release is only typically available past the age of 55. The money can be taken as a lump sum or in a series of scheduled smaller payments.
There are two main types of equity release; a lifetime mortgage and home reversion. The lifetime mortgage is the most popular option by far, allowing you to release cash from your home in the form of a loan that is repayable upon death or living in permanent care.
The loan will accrue interest that can be paid back in instalments or left until the loan is recovered.
House reversion involves selling part of your home to the loan provider. The loan will be repaid from the sales proceeds according to the ownership proportion between you and the provider.
Both options allow you to ring-fence some of your home’s value for inheritance purposes.
How much equity can I take from my house?
According to the Money Advice Service, you can typically borrow a maximum of 60% of your home’s value using equity release.
This varies primarily on the value of the home and your age. The percentage rises with age, representing the lower risk presented to the lender over a shorter lending period. It may be possible to borrow more if you suffer from certain medical conditions.
Below is an example table of lifetime mortgages provided for different value homes at different ages in 2021.
|Your home’s value
How to calculate the equity you have in your home
Calculating the equity available in your home is simple.
If you have a mortgage, you’ll need to subtract your remaining mortgage from the value of your home.
A £300,000 home and £40,000 mortgage would result in £260,000 total equity.
If you don’t have a mortgage, your home’s equity is its current market value.
The equity in your home may rise and fall depending on the housing market.
How to take equity out of your house: remortgaging vs equity release
There are two main ways to take equity out of a house, by remortgaging or by equity release.
Remortgaging is an option if you still have an income. By remortgaging, you’ll release value from your property, payable to you, and will either have to pay new mortgage payments or increase your existing payments.
Remortgaging can be advantageous if your home has increased in value. You may be able to release some of that value by increasing your mortgage for relatively little.
However, remortgaging generally comes with an age limit, and you’ll be assessed for the following:
● The value of your home and the requested amount
● Your income, either from employment, pension, savings or other income streams
● Your monthly outgoings
● The reason you need the money
● Your credit history
Equity release is more angled towards older people who want to release equity from their house without making repayments whilst they are still living in the house. Instead of paying back the loan in instalments, the loan will be repaid from the value of the home when it is no longer occupied.
How to choose equity release
Equity release is a financial product, much like a loan.
Equity release lifetime mortgage options can be compared on popular internet comparison sites. There are many features to look out for in a good equity release plan. Namely, the lender may offer a no negative equity guarantee and the interest rate can be fixed for the duration of the plan.
Home reversion equity release plans vary primarily on how much value you’ll be forecast to receive from your home once sold. You might get as much or as little as 20% to 60% of your home’s market value. Home reversion is typically only available to the over 60s or 65s.
Like lifetime mortgage equity release, home reversion plans typically come with a guarantee that prevents your estate from being in debt if your home’s sale is not enough to cover the loan repayment.
Benefits of taking equity out of your house
Equity release provides a tax-free sum that can be taken in a lump sum or in instalments. It does not necessarily mean taking a huge lump of value from your house – you can take smaller amounts too.
Equity release is often used for:
● Paying other mortgages or debts
● Home improvements
● To help other family members
● To pay for holidays and other trips or expensive items
● To fund the cost of care
The logic behind equity release is simple; your home is probably the most valuable thing you own by the time you’re 55 or over, but its value is ‘locked away’ until it’s sold.
Equity release unlocks some of that value for the present – it can be paid back when the house is no longer occupied, typically after death or after moving into long-term care.
Equity release also means avoiding downsizing. It provides a means to unlock value from a home without selling – perfect for if you want to remain in your home.
You also don’t need to worry about monthly repayments, but do have the option of paying some of your loan off too.
This provides flexibility – the loan and interest accrued can be paid back in its entirety from the sale proceeds of the house.
Alternatively, you can pay some or all of the loan back, say if you come into money from another source, decide to go back to work or otherwise want to and can afford to pay back the loan.
Interest rates on equity release are typically low, so you don’t lose too much value overall, especially if you only release a relatively small amount. Also, your home may rise in value ahead of interest rates.
Risks to consider
Equity release is not risky per se, especially as your estate cannot be indebted to the provider if the sale proceeds from the house fail to pay for the total value of the loan, though this would be an exceptionally unlikely scenario.
Note, only equity release products offered by members of the Equity Release Council come with this no negative equity guarantee by default.
However, given that lifetime mortgages charge compound interest rates, you will be paying interest on interest. At a 5% interest rate, your amount owed could double every 15 years or so. This will quickly erode the value of your home over a long period of time.
The tricky thing is, we don’t know how long we’ll live for. Men and women today who are between 40 and 50 today have around a 15% to 20% chance of living until they’re 100, according to the Office Of National Statistics (ONS).
By the time you die and your home is sold, your estate might receive nothing from it at all unless you ring-fence some of its value.
In short, equity release should be a stronger consideration for those aged over 65 or 70 than those aged below it.
The risk is similar with a home reversion scheme – you will receive at most 60% of your home’s value, essentially meaning a 40%+ ‘cut’ for the provider, which is taken from your home.
Is equity release right for me?
Whether or not you should choose equity release depends on your:
● Income, savings and pension
● How much cash you need and why
● Your plans for the future
● Your inheritors
Equity release is at its most useful and least risky when you have some capacity to pay off the interest and are releasing a reasonably small sum from your home, typically to pay for home improvements, a holiday or other items (like a car).
By paying off some interest, you’ll reduce the likelihood of compound interest eating away quickly at the value of your home.
It’s crucial to not underestimate how long you might live for when considering equity release.
Another consideration is that equity release will be taken into account if a council conducts a ‘means test’ on your capacity to pay for care.
Your equity release payments may deem the council to believe you’re deliberately depriving assets, according to Saga.
In this circumstance, having taken out equity release well in advance of going into care would be an advantage as the council may deem you to have lower assets than you would have had otherwise.
Ultimately, the pros and cons of equity release vary greatly from person to person. It is a major decision that shouldn’t be undertaken without a survey of all the options.
Speaking to an independent financial advisor is highly recommended, especially if you are considering releasing a large amount of equity from your home at a younger age.