Under pressure from rocketing energy bills?
Releasing some of the equity in your property could save you from shivering, says Paul Lewis
It’s going to be a bleak winter. Inflation will exceed 13%, a 15-month recession is forecast and fuel bills are expected to rise ever more sharply. Some help will come from the Government. But it’s unlikely to be enough. So older people who own their home could think of using some of its value to pay bills they can meet no other way. Equity release allows people over 55 who own their home to take out some of its value in cash. They do that by taking out a “lifetime mortgage”. This means you borrow money against the value of your home to spend now.
The interest is added on each year and the debt isn’t repaid until you die or go into a care home. In the past, equity release seemed a very expensive way to raise money – interest rates were high and sales weren’t regulated. But now the market has been reformed and people who opt for it are better protected.
Once you’re 65 you can borrow up to around one-third of the value of your home – more if you’re older. The best way to take it is as a “drawdown” loan. You agree a sum to borrow, but only take money from it when you need it, although there will be a minimum initial amount. You are only charged interest on the amount you have taken out, which reduces the cost. You can also choose to pay the interest on the loan if you can afford to do so, rather than having it added to what you owe. That means your final debt is just the amount you borrowed. Equity release rates are around 5% (beware – like other interest rates, they are rising) so may provide an affordable way to pay essential bills.
- Get your free guide to equity release written by Radio Times Paul Lewis
- Calculate how much you could release
- Do you already have an equity release plan? You could save money by reviewing your plan
However, if you choose not to pay the interest but allow it to be added to the loan, then the interest itself attracts interest . This is known as compound interest and will push up the final cost to your heirs after you’re gone. For example, if, at the age of 65, you borrow £10,000 at 5% interest per year, the debt will grow to around £28,000 by the time you die (on average) 21 years later. If you live longer it will of course be more.
So it can seem an expensive way to pay your bills. But remember that in the past 21 years house prices across the UK more than doubled, so the value of your home will also have risen in those 21 years and there should be plenty left. One in seven people who take out equity release uses it to pay debts. And if the prospect otherwise is shivering or going hungry, it may be an option to consider. You could also of course take out more than you need for your debts and perhaps renew your kitchen or bathroom, make your garden more retirement-appropriate, have a luxury holiday or help the kids with a deposit on their first home.
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Some properties may not be accepted – leasehold flats or houses must have at least 75 years left on the lease and freehold flats may not be accepted at all. Former council properties are often refused and mobile homes as well as certain sorts of construction are always excluded.
The money isn’t taxable, but it may affect your entitlement to means-tested benefits such as universal credit, pension credit, housing benefit or council tax discount. It won’t affect most disability benefits or the state pension. You must take advice from a regulated financial adviser with equity release qualifications and should always pick an independent adviser who can find the best product from the whole market. Only use advisers and providers who belong to the Equity Release Council, as this gives important guarantees, not least that the value of your loan can never exceed the value of your home.
You will be charged fees and you should always find your own solicitor to deal with the legal side. But if there is no other way to pay bills, which may be £300 a month or more this winter, equity release is certainly fuel for thought.
- Get your free guide to equity release written by Radio Times Paul Lewis
- Calculate how much you could release
- Do you already have an equity release plan? You could save money by reviewing your plan
Paul Lewis presents Money Box on Radio 4. To read more of his advice, see radiotimesmoney.com