More about equity release

What is equity release?

The value tied up in your home, less any borrowing against it, is known as equity. For example, if a house worth £350,000 and there is a mortgage of £50,000, the equity is £300,000. Of course, if there is no borrowing against the property, the equity is the same as the value of the house.

The problem for many people in retirement is that they have considerable equity in their home, but they can’t make use of it. In some ways, all that has been achieved by the rapid increase in house prices over the last few decades is to generate an inheritance tax liability when the property is transferred to their beneficiaries. Equity release is a process that allows people to withdraw some of that equity in cash.

What types of equity release are available?

There are two separate ways to release equity. One is to borrow money using your home as security with the expectation that the loan will be paid off when you are no longer here. In this way, you will always be the owner of your home. You can choose whether to pay all or some of the interest or even pay off some or all of the capital borrowed. The most flexible option is a Lifetime Mortgage, but you may also qualify for a Retirement Interest Only (RIO) mortgage or even a standard residential mortgage.

The second option is to sell part or all of your home for a heavily discounted price and retain the right to live in it until death or the need to go into full time care. This is called a Home Reversion Scheme and might provide a much higher level of cash than a borrowing solution. It is not generally a popular choice with homeowners who don’t want to give up ownership of their home.

We’ll help you to compare options here.

What can equity release be used for?

If you have no other access to funds, equity release might be needed for essential expenditure. This includes, for example, settling a standard mortgage if retirement has come sooner than expected or paying for essential repairs. Some people have used equity release to provide part of a divorce settlement so that one of parties is able to continue to live in the family home.

Some people might not have such an urgent need for the money but choose to give themselves a more interesting retirement by using some of the equity in their home. It can be used to pay for travel, buy a holiday home or a better car, or it might be used to provide additional facilities at home like a conservatory or beautifully landscaped garden. It might just be used to support monthly expenditure.

A further reason might be to provide a gift for beneficiaries in anticipation of them inheriting your estate. This could help with a house deposit or student debts, or just for the benefit of seeing your loved one’s benefit during your lifetime. Under certain circumstances, this gift might also help reduce the inheritance tax your estate will pay one day.

What are the risks of equity release?

There are some horror stories about equity release and how people suffered from inappropriate and badly arranged products in years gone by. This is no longer the case since advising on Equity Release is heavily regulated by the Financial Conduct Authority. You might also want to check that your adviser adheres to the principles of the Equity Release Council. But there are some disadvantages you should consider.

If you are entitled to state benefits, taking cash out of your home might have an impact on that entitlement. It is important to carry out equity release carefully to prevent loss of benefits.

Using any kind of Equity Release will have an impact on the value of your estate and reduce the amounts that will be paid to your beneficiaries. Even though you may have good pensions now, they may not keep up with increases in the cost of living. If you take out large amount of equity release when you are relatively young, there may not be enough equity available to provide support as you get older.

That being said, equity release can be an ideal solution for later-life borrowing and it’s worth a chat with an adviser to see if that might be the case for you.