What are the benefits and things to consider with equity release?
Before you make a decision on whether to apply for equity release, it’s important to have a good understanding of how it works.
Leaving a home filled with memories may not be appealing. For homeowners aged 55 and over who have considered downsizing but decided against it, equity release may offer a viable solution.
This option allows you to remain in your home while accessing funds to help support your finances.
Whilst equity release can provide valuable support for enjoying retirement to the fullest, it is essential to weigh the pros and cons.
Radio Times have teamed up with equity release specialists Age Partnership Plus to help you discover more about equity release and if it could be right for you.
Calculate how much you may be able to unlock >
What is equity release?
Equity release is solely available to homeowners aged 55 or older. It comes in the form of a lifetime mortgage, which is secured against your property, or a home reversion plan. It will reduce the value of your estate and impact funding long-term care.
A home reversion plan involves selling all or part of your home in exchange for a lump sum. You can continue to live in your home, typically rent-free, until you die or move into long-term care. At that point, your home is sold and you receive the proceeds from any share you still own, with the remainder going to the plan provider.
Please note that you won’t receive the full market value for the share of the property you choose to sell.
A lifetime mortgage is the most popular form of equity release, so the pros and cons featured in this article only apply to this specific type of plan.
With this plan you can receive the funds either as a lump sum or in smaller instalments.
Once you die or move into long-term care, your home will be sold and any money released, plus accrued interest would be required to be repaid.
What are the advantages of a lifetime mortgage?
There are a few benefits of a lifetime mortgage, from being able to live in and own your home to having the flexibility to release the money as and when you need. We’ve explained these in more detail:
Unlock tax-free cash from your home
Equity release allows you to turn the value tied up in your home into tax-free cash. The money you unlock is yours to enjoy spending once you’ve repaid any existing mortgage, a condition of equity release.
The amount you may be able to release depends on factors such as your property’s value, the age of the youngest homeowner and your individual needs.
A qualified equity release advisor will help you understand the features and risks involved, before providing a personalised illustration of how much you may be able to release.
Continue owning 100% of your home
Downsizing is one option to help you release the funds you require. However, if you don’t want to leave your home full of memories, a lifetime mortgage is a way to stay in the home you love for as long as you like, whilst accessing money to supplement your finances.
No repayments required
This is because the money you borrow, plus accrued interest, is repaid upon death or moving into long-term care.
You can choose a plan which allows you to make voluntary payments subject to certain limits, which some people prefer to do to stop the roll up of interest and reduce the impact to their estate. Your adviser will explain the details of your plan which could involve early repayment charges that may apply above a set value.
Find out more with your free equity release guide >
Flexibility
You can choose how you’d like to take the money you release, either as a lump sum or smaller amounts over time, known as drawdown.
Lump sums could be suitable if you have an immediate need for the funds, such as repaying an existing mortgage, purchasing a new car or providing a one-off gift to a loved one.
A drawdown might be more suited if you’re looking to supplement your income or have some future purchases in mind. You don’t pay any interest on the funds in the drawdown until you take them, meaning this can be more cost effective, however the funds will be on the prevailing rate at the time, which could be higher or lower than when you released the initial funds.
No negative equity guarantee
You may have concerns that if the value of your property decreases, it might not be worth enough to cover the amount you owe. Plans that meet the Equity Release Council’s Product Standards feature a no-negative equity guarantee.
This means that your estate will never owe more than the property is worth when it is sold.
With some plans, you can also safeguard a portion of your home’s value to guarantee an inheritance for loved ones, but this will reduce the amount you are able to release.
Discover how much you could release >
What are the drawbacks of equity release?
Equity release does have a few risks to consider, from the effect of a fall in house prices to a reduced inheritance for your loved ones. These are explained in more detail below:
Accumulation of interest
As you are not required to make any repayments to cover the interest on a lifetime mortgage, the interest is added to the amount you borrow, and the balance increases each year. Over time, this build-up of interest can mean the amount you owe becomes significantly higher than the amount of funds you initially released.
If you don’t make any repayments, then a lifetime mortgage could be one of the options that costs the most over the lifetime of the plan when raising funds for retirement.
With a lump sum plan, the interest rate is set when you take out the loan so you know exactly how much interest you will be paying over the life of the loan.
With drawdown, it can be a bit more complex. You only pay interest on the money when you withdraw it, and since lifetime mortgage interest rates change, the interest rate for any funds taken from the drawdown facility will be charged at the prevailing rate at the time the funds are drawn.
Impact on benefits
The additional money from releasing equity might push you above the eligibility threshold for some means tested benefits, now or in the future. An adviser can talk you through the considerations and point you towards the right people for further advice.
Reduced inheritance
Releasing equity will reduce your estate and the amount you can leave as an inheritance so it’s important to discuss the plan with your loved ones before deciding whether to go ahead. A reputable equity release adviser will always encourage you to do so. It will also reduce the amount of equity available to you to fund any long-term care.
Costs and fees
There are various costs associated with equity release. including advice fees, valuation fees, and legal fees.
Advice is required to proceed with equity release and there may be other options which better suit your circumstances.
Through the Radio Times equity release service, Age Partnership Plus provide initial advice for free and without obligation. Only if your case completes would an advice fee of £1,995 be payable. Other lender and solicitor fees may apply.
Complexity
Equity release can be complex and is a long-term financial commitment, so it’s important to get the right advice and be fully informed of the risks involved, the effect to your estate, and the costs you will incur if you don’t want to have the mortgage in place anymore.
Overall, while equity release can provide financial flexibility for those in retirement, it’s crucial to carefully weigh the downsides and consider alternative options before proceeding.
Consulting with a qualified equity release adviser, such as those at Age Partnership+, can help you make an informed decision that aligns with your long-term financial goals.
Find out more with your free guide written by Paul Lewis
The Radio Times equity release service is provided by Age Partnership Limited. Radio Times is a trading name of Immediate Media Company London Limited which is an Introducer Appointed Representative of Age Partnership Limited, 2200 Century Way, Thorpe Park, Leeds LS15 8ZB. Company registered in England and Wales No. 5265969. VAT registration number 162 9355 92. Age Partnership Limited is authorised and regulated by the Financial Conduct Authority. FCA registered number 425432 and is trading as Age Partnership Plus.