House prices are soaring – up nearly ten per cent in a year. And that could be useful even if you already have one and don’t want to move, because those who live in a mortgage-free home can get cash from its value.
The way to do it is called equity release and although it has had a very bad press in the past, nowadays it is better value and there is a lot more choice. So it can be a sensible way to solve the conundrum of living in a valuable home but not having enough to spend.
It works like this. You borrow money against the value of your home. You are charged interest on that loan, which you do not pay; instead, it is added to your debt each month or year. Next year, interest is added onto the total including last year’s interest. When you die, the total owed is taken from your estate.
In the past, the interest charged was very high. Nowadays it can be four per cent or less. At that rate if you take out £10,000 and live 20 years, the debt will be £22,000 to be paid from your estate. Good equity release providers never let the debt exceed the value of your home, and this “no negative equity” guarantee is given by all firms that are members of the Equity Release Council. Never use a firm that is not a member.
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At 65, you can release just over a third of the value of your home to spend now. By the time you reach 85 that rises to more than half. For couples, it is the age of the younger person that counts.
Equity release is not right for everyone – if you get means-tested benefits like pension credit, they will be reduced or disappear – and some property is not eligible.
If you have savings, use those before taking on debt. There are alternatives to equity release and many different variants of it, so always get independent financial advice – the word “independent” means the firm is not tied to just a few providers it has made deals with.
Paul Lewis presents Money Box on Radio 4.