Equity release is an increasingly popular way for individuals over 55 to access finance and fund their retirements – in fact over £3 billion was lent out to senior citizens in 2017 alone.
The process of equity release means that homeowners can give up a stake or ‘equity’ in their homes and receive a large amount in one lump sum – usually up to 35% or 60% of their property’s value.
When the homeowner passes away or moves into a care home, the provider is able to claim their stake on the property and make a profit by the expected increase in the property’s value. Before jumping in and giving up equity in your home, we explain some of the things to consider:
The loan purpose
Equity release is commonly used for home improvements such as new kitchens, gardens, loft conversions and adding senior-friendly changes to the house. Whilst equity release can work for several people, one has to consider whether other alternatives would be more cost-effective.
For instance, downsizing into a smaller property could potentially yield a higher return and allow you to retain full equity in your home.
Similarly, there are other ways to access money quickly if you are above 55. This includes renting out a spare room in your house, renting out your driveway to local commuters or simply applying for a secured loan.
Home reversion vs lifetime mortgage
A key consideration is that equity release comes in two forms, this is home reversion and lifetime mortgage.
A lifetime mortgage means that you can continue to release equity through your lifetime, whether you are 55, 65 or 95. This means that you can access finance as and when you need it, which could be more effective and avoid giving up too much equity in your property. It also means that you benefit from any future increase in value in the property and can pass this onto your kids as inheritance.
By comparison, home reversion allows you to borrow significantly more money than a lifetime mortgage. However, it does involve giving up almost all (or part) of your property – so you have no benefit from future property price increases or being able to pass it onto your children.
Getting the best rate
Whilst equity release providers essentially take a stake in your property, they also charge interest too (in case the property does not increase in value). It is important to compare different schemes available and also understand which is better for you, a home reversion or lifetime mortgage. There are several websites which offer equity release calculators and this is a useful measure to see how much money you could release and what impact it will have on your property’s future worth.
Those applying for equity release also need to consider the importance of inheritance and whether they intend to pass down money to their children when they die.
Perhaps your children are well off or you have no children, in which case a full home reversion could work effectively to boost your retirement income. Otherwise, if you have plans to pass on money to your children, a lifetime mortgage could be a better option and also come with relief for inheritance tax.
It is important to speak to providers and fully understand the implications equity release will have on your children’s inheritance and hopefully you will be able to come to a solution that meets your requirements.