Thanks to the continued soaring of house prices, many people who have owned their property for several years have seen the value of their estate rise significantly.
Because of this, equity release is becoming increasingly popular. Equity release is essentially a method of accessing some of the value of your home while you continue to live there.
But how exactly does equity release work, what are the risks, and could it be right for you? Read on to find out the answers to these questions and more.
There are two main methods of equity release
Equity release essentially acts as a method of extracting cash out of your property without the need to move home. Between April 2020 and May 2021, the Guardian found that £830 million was withdrawn from the homes through equity release and gifted to family members.
To be eligible for equity release, you must be over the age of 55 and own your home, though you may not necessarily need to have paid off your entire mortgage yet.
There are two different types of equity release to be aware of, a lifetime mortgage, and a home reversion plan.
Lifetime mortgages are the more common of the two methods. A lifetime mortgage works by lending you money that is repaid from the sale of your property when you move into long-term care or pass away.
Typically, a lifetime mortgage does not require monthly repayments but does accrue interest, which will be added on to the total cost when your home is sold. More recently, however, options to repay the interest early and sometimes even the loan itself have been introduced.
The other method, a home reversion plan, works slightly differently. This time, the money you receive is based on “selling” a percentage of the value of your home. So, for example, you may choose to take a home reversion plan on 30% of your property.
Similarly, there are no monthly payments necessary on this loan. Instead, the lender retains their percentage stake until the property is sold. In this case, the lender would receive 30% of the proceeds, irrespective of whether the value of your home had risen or fallen.
Equity release can help to give much-needed financial relief to you or your family
The amount of money you could receive from equity release might be perfect to help you or your family navigate financial difficulty. This is especially true given the current housing market.
Extracting money from your home could help your younger family members buy a home if you were to gift part or all of their deposit. In fact, more than 50% of the £830 million gifted through equity release was used in this way.
Alternatively, you could use the extra money to supplement your own retirement income. With many people living longer lives, it is harder to plan for your later life.
It may prove useful to have the money on hand, ready to deal with potential care costs or to help you achieve the retirement lifestyle you want.
Lastly, gifting in this manner could help reduce the value of your estate before you pass away, helping to mitigate the effects of Inheritance Tax (IHT). IHT is only charged on the value of your estate above a certain amount, so reducing your estate can help you nullify or reduce your IHT bill.
Some factors to consider before you commit to equity release
Large financial decisions require a lot of thought and planning, and the same should be said for equity release. There are risks involved, and you must be sure that it is the right choice before proceeding.
Firstly, not every property will be valid for equity release, and most providers will not consider properties below the value of about £70,000. This means you may not be able to receive the cash injection you were expecting.
If your property is eligible, equity release loans generate interest, just like any loan or mortgage. If you take out a loan and live for many years without paying off any interest, it’s likely that a significant amount of interest could accrue. This will reduce the equity in your home and mean you leave less to your beneficiaries.
This is why it’s so important to talk to your family and manage their expectations before committing to equity release.
Additionally, interest rates on equity release can be more expensive than more traditional mortgages. So, for example, if you can afford to make a monthly repayment then there may be other lending options that are more appropriate – particularly if you’re younger.
There may also be associated fees for solicitors and surveyors which you should take into account.
Plus, since the money will be repaid when your home is sold, it is your responsibility to ensure that the home remains in a sellable condition. You will therefore have to consider the upkeep and maintenance costs of your home.
It may be worth finding an equity release provider who abides by the rules of the Equity Release Council, which helps protect both you and the provider. These schemes will lay out rules and guidelines which the lenders must adhere to, such as a no-negative-equity guarantee.
Equity release could mean you lose access to certain benefits
Lastly, it is worth noting that taking equity release may result in a level of savings which means you no longer qualify for some means-tested benefits. These could include Council Tax reduction and Universal Credit, which both require you to have less than £16,000 in savings.
You may also need to pay more towards your care costs than you were expecting. Under the current rules, which are set to change in 2023, your local council may cover some of the costs of your social care if you have less than £23,250 in savings. By taking equity release, you may become responsible for covering the costs of your care.
You also need to be careful of a type of benefit fraud known as “deprivation of assets”. This is when someone claims benefits and artificially reduces the value of their savings by giving money away or spending it.
If you take out equity release, spend or give money away, and then claim benefits it could lead to a potential fraud investigation.
Talk to a financial planner before making a decision
It is always best to consult a professional before making any big financial changes. A financial planner could help raise problems that you may not have considered, and less risky alternative methods to reach your goals.
If you’d like to find out more about equity release, or ask one of our experts whether it is right for you, please email info@investmentsense.co.uk or call us on 0115 933 8433.
Please note
Equity release may involve a lifetime mortgage. To understand the features and risks, ask for a personalised illustration.
Think carefully before securing other debts against your home.
