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The Week
The Week
National
Marc Shoffman

Is equity release right for you?

Homeowners can release cash locked up in their property without having to sell

A growing number of older homeowners are taking out equity release products as mortgage rates and living costs climb. 

According to latest data from the Equity Release Council (ERC), monthly activity in the market rose in May and then again in June. And although market activity is down from a record high in 2022, the “socio-economic factors” for releasing equity remain, said ERC chair David Burrowes.

“People are living longer, they are not saving enough for retirement and they want to help themselves and their loved ones to live more comfortable lives,” he added.  

However, releasing equity is “a big financial commitment”, said Compare the Market, so “think carefully about its implications”.

What is equity release?

Following decades of rising house prices, a “large proportion” of many “homeowners’ wealth is sunk into their property”, said Unbiased, and “is therefore inaccessible”. 

Equity release allows older homeowners to convert some of the value of their home into cash without having to sell up.

The homeowner must be aged over 55, “and if you’re borrowing jointly you both need to be over” this minimum age, said Compare the Market. The loan and interest doesn’t need to be paid back “until the last homeowner in the property dies or goes into long-term residential care”. 

And the money released can be put towards anything from “improving your property, to gifting an early inheritance or clearing an existing mortgage”, the comparison site added.

Around £5.85 billion of property wealth was released in 2022, according to data from Key Later Life Finance – a 27% increase from 2021.

Of the total released last year, around £3.3 billion was used to repay secured or unsecured debt, “as customers sought to straighten their finances in the face of rising interest rates and inflation”, said MoneyWeek.

How do equity release products work? 

There are two types of equity release product. 

The most popular is a lifetime mortgage. Similar to a standard mortgage, this is a loan secured on your property, but the borrowed money and interest is “rolled up”, said MoneyHelper. The repayment is usually made by selling the property after the last borrower dies or moves into long-term care.

But borrowers can usually “ring-fence some of the value” of their home to preserve as an inheritance, added the site. 

The other option is a home reversion plan, which is “essentially selling a stake in your home”, said Compare the Market, although usually at a rate “much lower compared to its market value”. The debt is repaid once the house is sold. 

The amount that can be loaned usually depends on the age of the borrowers and the value of their property, but “the older you are, the more you can release”. The release limit is usually up to 60% of the property’s value.  

Is equity release right for you? 

Equity release lets older homeowners access cash now to supplement their retirement income, “rather than leaving it locked away” in their home, said Unbiased.

On the negative side, that will reduce the amount of inheritance left by the homeowner, although inheritance tax bills will also be lower and the unlocked money could be gifted as an early inheritance. 

Bear in mind that interest rates on equity release products tend to be higher than on “mainstream” mortgage, warned This is Money. And “the longer someone lives, the more interest will accrue”, although some providers will let borrowers pay off some of the interest and reduce the debt owed. 

Getting an equity release product rather than a mortgage may be easier, however, as the “affordability checks are different”, the site continued. But the extra income “can affect borrowers’ eligibility for certain means-tested benefits”.    

Before taking out any equity release product, check that it has a no-negative-equity guarantee, advised Compare the Market. All ERC members have this guarantee, which ensures that if the property’s value has fallen below the outstanding loan, “your estate won’t be held responsible to make up the difference”. Instead, the difference will instead be written off. 

The homeowner should also consider whether they might move in the future, the website added, “as you’ll need to get in touch with your lifetime mortgage provider” to check if the loan can be transferred to the new property.

Ultimately, equity release “isn't something to be taken on lightly”, said MoneySavingExpert. The Financial Conduct Authority requires that anyone applying for a lifetime mortgage or home reversion plan must first seek advice from a qualified equity release adviser.

An equity release product will suit some people, but others may be better-off downsizing to a property where they can live off the excess cash from the sale. 

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