Equity release is growing in popularity and particularly as way to pay for care.
Many homeowners are using their houses as a cash machine to help fund their retirement. Statistics show that schemes which allow older property owners to unlock the value tied up in their properties are enjoying record take-up.
A record amount of £1.02 billion was unlocked by homeowners in Q3 2018, up from £195 million (24%) in the same period of 2017. Additionally, homeowners aged 55 and over withdraw about £11 million of property wealth every day to support their finances.
But what is equity release and is it a good option to fund your retirement needs? Here we explain what equity release is, the types of plans available, the pros and cons of equity release alternatives.
You can read more about these options below.
Equity release allows you to access equity built up in your home.
You can do this while continuing to live in the house until you die or move out permanently. This scheme is available to people aged 55 and older and you don’t need to have fully paid off the mortgage to do this.
Here is a short video explaining more about what equity release is.
If, before looking at the alternatives to equity release you want to see how much you could get, you can try out the calculator below.
If you’re looking for ways to boost your income later in life, equity release is a becoming an increasingly popular option. But before you go ahead with this option, it is worth considering the pros and cons described above and exploring the alternatives.
Here are 10 equity release alternatives you may want to consider:
When the kids have grown up and moved out, you might have more space in your home than you need. Selling the home and moving to a smaller, less expensive property can generate a lump sum of money.
While downsizing is cheaper and more flexible than some other methods, it comes with some disadvantages. If home prices are falling the time you are selling your home, you might end up with less money than you hoped.
Additionally, it could take some time to find a buyer and a good place to spend your golden years. Downsizing can also be costly and have huge emotional impacts.
These include moving costs, estate agent’s fees, legal fees, stamp duty, buying new furniture, redecorating to suit your tastes, leaving your longstanding family home and losing support from friends and family who are nearby.
If you only need a relatively small amount but quickly, then a credit card may be a great option. Low interest rates and a battle for clients between credit card providers mean there are great deals available on the market.
For example, the Lloyd Bank Platinum Low Rate credit card offers an interest rate as low as 6.45% depending on your circumstances. Additionally, it has an annual fee of £0 and when you make a balance transfer within the first 90 days of opening an account, you get a no-fee deal.
The best option when opting for credit cards is to go for cards with a low interest rate, however, this will be more suitable for small amounts of money.
Another alternative to equity release is to look at other types of mortgages. A retirement interest-only (RIO) mortgage is a great option as it allows you to borrow more than you would with equity release.
With this type of mortgage, you are only required to make payments each month until you die or move into residential care. The lender gets their loan repaid when the house is sold.
However, before you go this route, you need to prove that you can afford the monthly interest payments, which is not required when applying for equity release. Another difference between RIO and equity release is that RIO has lower interest rates and your beneficiaries are likely to receive a larger amount of inheritance money.
Another option to equity release is to move your mortgage from one lender to another. Remortgaging with a lower interest rate and better terms can reduce your monthly payments freeing up cash for other expenses such as paying off debts or home improvements.
It’s also a great way to release some cash built up in your property.
Before you start shopping for remortgage deals, decide on what product you want – for example, a fixed rate, variable rate or tracker.
Then speak to a lender directly and use a comparison website or the best-buy tables in the financial pages of newspapers to find the best deals. If you don’t want to do the legwork, a mortgage broker can be valuable.
This is also a good alternative to selling your house fast.
Even if you’re retired, you can take out a personal loan against your property. Borrowing via a personal loan will help you avoid the high fees associated with equity release plans.
Additionally, loans can be arranged for short terms as and when you are in need of money, unlike equity release which is a lifetime arrangement.
This solution has some downsides though. Interest rates on personal loans are more expensive than mortgages. If you’re unable to keep up with the monthly payments, you risk having your property repossessed. Therefore, before opting for this option, make sure that you have enough income to make repayments.
Most retirees have some form of savings or investments tucked away for a rainy day. If you have any built-up savings or investments, consider using those to achieve your financial goals instead of using equity release.
However, before cashing in on any investments, be sure to consider any tax implications or better yet seek professional advice.
If your home has more space than you need, consider renting out a room. Under the ‘Rent a Room’ scheme, you could receive up to £7,500 per year for letting out furnished accommodation to a lodger.
This is a great way to increase your income without moving out of your current property.
You could ask for help from your relatives. While this may not be an easy subject to bring up, they may prefer to help you than allow you to sign up to equity release deals which could leave them with little or nothing to inherit.
Another alternative to equity release is to claim all benefits and local grants that you are entitled to. These include borrowing for home improvements or conversions to deal with disability. To find out what benefits you might be able to claim, visit the Gov.uk Benefits Calculators.
If you’re currently not living within your means, look at your income and outgoings to see if there are any things that are costing you money.
The equity release alternative you pick will depend on your current financial situation, the amount of money you want to raise and how quickly you want to raise it. Just make sure to talk to an expert financial adviser before making a decision.
There are two main types of equity release plans:
With a lifetime mortgage, you borrow money against your home’s value. You receive a one-time amount and like other types of life mortgage, you retain 100% ownership of your property.
This equity release option has evolved over the years to provide flexibility in the way homeowners access their money and make payments. Consequently, different types of life mortgages have emerged.
These include:
You can use an equity release calculator to see how much money you could borrow.
Here is a short video that explains more about how lifetime mortgages work.
Available to UK homeowners aged 65 and over, a home reversion plan involves selling part or all of your property in exchange for a regular payment or a lump sum. Reversion companies pay below the market value because you get to stay in the house rent-free until you move out permanently or die.
Equity release schemes can seem appealing, but are they the best way to raise money?
Here is a short video that runs through the pros and cons of equity release.
Below, we weigh up the pros and cons of equity release.
An equity release calculator will tell you how much money you could receive as a tax-free lump sum. The amount is usually dependant on your age and the value of your house.
Interest rates vary and can be anywhere between 3% and 7%. You can call us on 0800 953 3792 and get information on the latest deals, as they can change every day.
Yes, the money you receive is tax-free. However, if you are in receipt of means-tested benefits then these can be impacted. You can contact us on 0800 953 3792 and see if you would be impacted.
The money from equity release can be used for a variety of things. Typically it is used to pay for long term care, modify your home to help with later life living or even to treat yourself to a holiday of a lifetime and help your family financially.
The most popular type is called a lifetime mortgage. If you are over 65 then a home reversion plan might be a better option, Get in touch with us and we will be able to tell you what we think would be best for you.
1 - What is an equity release calculator
2 - What sort of interest rates are applied to equity release mortgages?
3 - Is the money from equity release tax-free?
4 - What can you use the money from equity release for?
5 - What are the different types of equity release mortgage?