This article was last updated on 1 October 2020.
Equity release is growing in popularity and particularly as a way to pay for care in later life. Any product that enables the release of equity is regulated by the financial conduct authority, giving you security and peace of mind.
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 releasing equity is, the types of plans available and differences between them, and the benefits and drawbacks for your consideration.
You can read more about these options below.
Equity release allows you to access wealth held up in your household.
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 your mortgage to do this.
Here is a short video explaining more about what equity release is.
If you’re looking for ways to boost your income later in life, equity release products are 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 differences between the alternatives.
Here are 10 other forms of assistance 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 your home and moving to a smaller, less expensive place of residence 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 at the time you are selling your home, you might end up with less money than you hoped. You will also need to pay an estate agent.
Additionally, it could take some time to find a buyer and a good place to spend your golden years. The fact is, downsizing can be costly and have substantial emotional impacts.
These include moving costs, estate agent’s fees, legal fees, stamp duty, buying new furniture, redecorating to suit your tastes, leaving your long-standing family home and losing support from family and friends in the community.
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 those with a low interest rate; however, this option is more suitable for borrowing smaller amounts of money.
Another alternative to equity release is to look at other types of mortgages. One sort is an RIO, which is a great option as it allows you to borrow more than you would with equity release.
With retirement interest only, you make interest repayments each month until you die or move into residential care. The lender gets their loan repaid when the house is sold.
However, before going down this route, applicants need to prove they 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, so beneficiaries are likely to receive a larger amount of inheritance money.
Another option is to change mortgage providers before completion of your current mortgage term. 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 estate.
Before you start shopping for mortgage rates and lenders, decide on what product you want – for example, a fixed rate, variable rate or tracker. This will enable you to find the best offer.
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 residence. 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 need money, unlike equity release, which is a lifetime commitment.
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. Speak to an expert adviser, who can give you tips and assess your personal finance.
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 from experts.
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.
Leasing rooms is a great way to increase your income without moving out of your current residence.
However, having a tenant living with you is not the best decision for everyone.
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.
Furthermore, if the funds are necessary for your health, they might be more than happy to help.
Another alternative to equity release is to claim all benefits and local authority grants that you are entitled to from the government. These include borrowing for home improvements or for conversions to deal with your 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 any things are costing you unnecessary 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.
While there are many products available on the equity release market, there are two main ones, both regulated by the financial conduct authority (FCA):
With lifetime mortgages, you borrow money against your home’s value. You receive a one-time amount, and you still remain the sole homeowner. For many, this option gives a more pleasant experience than others.
This equity release scheme has evolved over the years to provide flexibility in the way borrowers access their money and make payments. Consequently, different types of lifetime mortgages have emerged. To help you make your choice, we have compiled some information below that gives detail on the differences between them.
You can use an equity release calculator to see how much money you could borrow, based on your age and personal details.
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.
This is a common question asked, and the answer depends on the type of plan you decide to take out. In the case of a lifetime mortgage, then you remain the homeowner. However, if you choose a home reversion plan, your provider owns all or part of your house. You do still have a lifetime lease, though.
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. There are also plenty of guides out there, discussing the different choices and factors to consider. With such a range of equity release products out there, though, we recommend having your questions answered by a specialist before making any final decisions.
Below, we weigh up the advantages and disadvantages of equity release.
Once and done – after you sign up to an equity release plan, you won’t be able to take other loans using your property
We work with with Key equity release for them to bring you their market leading equity release support. Through a free consultation they can help you decide what the best options could be for you.
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Or you can call Key directly on 0800 953 3792
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