If you’re a homeowner, an equity release loan can be a good way to release some of the cash tied up in your property to fund a major life event. But with so much conflicting information available, it can be difficult to know what’s true and what isn’t when it comes to equity release.
The various myths around equity release deter many eligible individuals from exploring this option even if it could help them improve their finances. Because of this, it’s important to do your research and learn some little-known truths about equity release – regardless of whether you’re nearing retirement age or are just planning for the future.
What is equity release?
Before delving into some little-known truths about equity release, it’s important you know exactly what equity release is. Put simply, equity release is a type of secured loan that allows you to access some of the tax-free cash tied up in your home without having to move.
It can be a good way of accessing money if you’re aged 55 or over and consider yourself to be house-rich but cash-poor. This essentially means that your home has significant value but you don’t have as much accessible cash and assets.
The two main types of equity release are a lifetime mortgage and a home reversion plan. The type that’s best suited to you depends on your financial situation and what you are planning to do with the money after it’s been released. We’ve outlined each type in more detail below:
Lifetime mortgage
A lifetime mortgage is a type of secured loan that allows you to access the funds in your home without needing to sell it. During a lifetime mortgage, you’ll still own your home and can continue living there until you die or move into long-term care, after which time your home is sold to pay off the loan.
It’s often recommended if you want to supplement your retirement savings, fund a major home improvement, or gift a major life event for a family member (e.g. for university or to purchase a first home). However, it’s only available if you’re aged 55 or over and you own your home.
Once the money has been released, it can be accessed in full (known as a lump sum) or as one smaller amount and several smaller amounts over time (known as a drawdown).
Home reversion plan
A home reversion plan is a type of equity release that allows you to sell all or part of your home (between 25% and 100%) in exchange for a lump sum, a regular income, or a combination of both. Like a lifetime mortgage, you can continue to live in your home during a home reversion plan.
Being in a home reversion plan is often described as being a tenant in your own home as you’ll no longer be the sole owner of the property but will get to continue living there. The only difference is that you won’t need to pay rent.
However, the provider won’t take any money out of your home until it goes on the market and sells, which usually happens once you die or move into long-term care. This also means that, the less time spent in your home, the better deal you’re likely to get as the value of your home is unlikely to change that much in a short space of time.
How much debt do you have?
What is equity release used for?
There are various reasons why people choose to release equity from their home and what you use the money for is up to you. Here are some of the most common things it is typically used for:
- Supplement retirement savings
- Gift a friend or family member
- Fund a major life event (e.g. a graduation or a wedding)
- Repay an existing mortgage
- Pay for a major home improvement (e.g. an extension)
- Pay off a second mortgage or existing debt
- Fund an expensive purchase (e.g. a new car or a holiday)
The reason for releasing equity also impacts whether you access it as a lump sum or in regular instalments. Most people prefer to receive the money in smaller amounts over time.
8 little-known truths about equity release
There are many equity release myths and truths out there, making it difficult to differentiate between what is true and what isn’t. Here are some of the main little-known truths about equity release that you should know about:
1. You can still leave an inheritance
It’s a common belief that releasing equity from your home means you can no longer leave an inheritance for your loved ones, but this isn’t true. Many providers offer something called ‘inheritance protection’, which ensures your family will still inherit a portion of the property’s value after it’s sold.
However, it’s worth noting that the more you want to protect, the lower the amount you will be able to release from your home. In other words, if you want to protect 20%, the maximum amount you can release will be lowered by 20%.
2. It can affect your benefit entitlement
Releasing equity from your home as a large lump sum can impact your eligibility for some means-tested benefits, such as pension credit. It’s therefore important to consider whether releasing equity could potentially stop you from receiving any benefits you need to maintain a reasonable standard of living.
By opting to access your money through a dropdown method instead of regular instalments, you could minimise the impact equity release has on your benefit entitlement.
3. You don’t have to sell your home
Many people believe that releasing equity means they have to sell 100% of their home to the provider. However, with a lifetime mortgage, you don’t have to sell any of your home to access any of the money tied up in it.
The only time you’ll be selling a part of your home is if you choose a home reversion plan and, even then, it can be as little as 25% of the property’s total value.
4. You can release equity with an existing mortgage
It’s normal to still have an outstanding mortgage at age 55. So if you’re one of the many people who hasn’t paid off your mortgage at this age, this should have no impact on your ability to enter an equity release plan.
The only rule is that you must use the equity released to pay off your existing mortgage.
5. You can still move if you want to
One of the most common concerns among those considering equity release is whether they’ll be locked into the same property for the rest of their lives. However, most providers are members of the Equity Release Council, which requires all members to allow their customers to move to a ‘suitable alternative property’ if they wish to do so.
In most cases, you will simply carry over the loan from the old property to the new property and the terms and conditions will remain unchanged.
6. It isn’t just for your main residence
It’s often mistakenly reported that you can only release equity from the property that you use as your main residence. The truth is, there is nothing stopping you from unlocking some of the cash tied up in a second property as an alternative to your main residence if you wish to do so.
The money released will still be tax-free and yours to spend as you wish, just as it would if you had released it from your main residence. This also means that, if you have an outstanding mortgage on your second property property, it must be cleared with the money released.
7. Your credit history doesn’t matter
Because equity release is a type of loan, it’s normal to assume that your credit history – and especially any former debts – will be taken into account before you’re approved. However, because you don’t need to make regular payments, you won’t need to prove your income or have a good credit score.
The only time where a poor credit history might impact you is if you apply for an interest-only lifetime mortgage as this requires you to make monthly interest payments. In addition, your lender might insist that you pay off any existing debts, arrears, or court judgments with the money released.
8. Your age or health could unlock a better deal
The amount of equity you can release generally increases with age, but most providers set a minimum and maximum age threshold so they can limit the risk that they take on. Generally, the older you are, the higher the percentage of your property’s value you can access.
Certain health conditions or lifestyle choices might also allow you to access better deals – especially if it lowers your life expectancy and means your lender is likely to recover the money sooner.
“No fuss, just simple, honest advice. Communication is good and they make the process as easy as they can.”
Do you pay interest during equity release?
Because equity release is a type of loan, you’ll usually need to pay interest on it. However, how much interest you’ll need to pay and how you pay it depends on the type of equity release chosen.
In most cases, the interest ‘compounds’, which means that it increases over time and is not only charged on the original amount borrowed but the amount borrowed plus the previous period’s interest. This way, the amount you owe will continue to increase – even if the interest rate stays the same.
Remember, when you release equity, the interest or the initial amount borrowed won’t need to be paid back until you pass away or move into long-term care. It’s also worth noting that the amount of money owed will never exceed the value of the property at the time.
What is a no-negative equity guarantee?
If you’ve been researching the pros and cons of equity release, you might have stumbled upon the phrase ‘no-negative equity guarantee’ and wondered what it means. Put simply, it’s a clause contained in some equity release plans that guarantees that you will never owe more than the property is worth when it’s sold.
Remember, equity is the value of the property minus any loans taken out against it. For example, if you have a home worth £300,000 with an outstanding mortgage of £50,000, you will have £250,000 of equity. If you have a home worth £300,000 with an outstanding mortgage of £350,000, however, you will have negative equity of -£50,000.
In the unlikely event that the value of your property declines and you end up with negative equity, the no-negative equity guarantee will mean the remainder of your loan is written off (cancelled) and any excess is absorbed by the lender.
What are the risks of equity release?
It’s important to familiarise yourself with the risks of equity release before making a final decision. Here are some key points to consider before applying for an equity release scheme:
Potential fees and charges
In addition to compound interest – which is the biggest cost to consider – there are several other fees and charges you need to know about when you release equity. This includes a financial advice fee, an arrangement fee, a valuation fee, buildings insurance, an early repayment fee, and property maintenance costs, which can total anywhere from £1,000 to £3,000.
Long-term commitment
Equity release is not the kind of decision that should be made lightly – it’s a long-term commitment that can have a significant impact on your financial situation and must therefore align with any future financial goals you have. If you change your mind down the line, you’ll likely need to pay early repayment charges and this can be as much as 25% of the original loan.
Eligibility criteria
There are strict eligibility criteria you must meet before you can qualify for equity release in the UK. For example, your property must be of standard construction (e.g. bricks or stones), in good condition, and have a minimum value of at least £70,000 and you must be aged 55 or over and have little or no mortgage left.
Debt help tailored to you
From writing off a large portion of your debt, to readjusting your budget, we’ll find a solution that suits you.
What are alternatives to equity release?
Equity release can help you fund a large purchase or free up some cash for your later years, but it isn’t the only option available to you. Before deciding to release equity, it’s important to consider all your available options.
Here are some of the main alternatives to equity release:
Remortgage your home
Instead of releasing equity, remortgaging is another popular method of accessing money tied up in your home. Because interest rates are typically lower and you’ll repay the capital and interest over time, it’s often more cost-effective and less risky in the long run.
However, some lenders have eligibility criteria you must meet to be able to remortgage, such as being employed or being under a certain age, so you might be limited in your choice of providers.
Downsize to a smaller property
Older homeowners looking to access cash should consider downsizing to a smaller property before deciding to release equity. This could involve moving into a smaller home in the same area or a similar-sized home in a cheaper postcode.
However, it’s worth noting that while a smaller property can result in lower council tax and household bills, it can take time to sell a property and you’ll need to factor in estate agent and legal fees.
Rent out a room in your home
If you have the space to do so and are happy to live with someone else, renting out a room could allow you to earn an extra income stream without needing to release equity or sell your home.
The government’s ‘rent a room scheme’ means you can earn up to £7,500 tax-free cash this way as long as the room is furnished and of a reasonable standard. Alternatively, short-term leasing platforms like Airbnb or Vrbo can be a good way of earning extra cash whenever it suits you.
Conclusion
Equity release is a way of accessing some of the tax-free cash tied up in your home if you’re over the age of 55 and don’t want to sell your home. Depending on your reason for releasing equity, you have the option of a lifetime mortgage or a home reversion plan.
Despite what you might have heard about equity release, you can still leave an inheritance and you don’t have to sell your home. It can, however, affect your benefit entitlement and there are potential fees and charges to consider.
Some of the most common alternatives to equity release are remortgaging, downsizing, and renting out a room in your home. It’s important to research all your available options before making an informed decision.
