What is equity release, and could it be used to fund your retirement?


More homeowners are choosing to unlock the wealth tied up in property with equity release, figures show. But what is it and why are more retirees choosing to support retirement income with this option?

What is equity release?

Equity release refers to a range of products that allow you to receive money based on the value of your home. Usually, equity release products can only be used if you’re over the age of 55. You can choose to take a lump sum as equity release or receive several, smaller amounts.

When you use equity release, you’ll be giving up a portion of the equity you own in your home. Broadly speaking, there are two equity release options:

Home reversion: This is where you sell part or all your home in return for money. You can still live in your home rent free until you die or move into long-term care. The percentage of the home you own will remain the same, even if the value increases or decreases.

Lifetime mortgage: With this option, you take out a mortgage that’s secured against the property, while still retaining ownership. You can then choose to make repayments or let it roll-up. The amount you owe will be taken from the property’s value when you die or move into long-term care.

With both options, you can ringfence a portion of the property, for example, as an inheritance. However, this will affect the amount you can release from your property.

Equity release products are becoming more flexible. 80% offer consumers the choice to make ad-hoc, penalty-free or partial repayments on their loans, research from the Equity Release Council shows.

The equity release trend

The number of homeowners choosing to use an equity release product is growing. The research found:

  • The number of people using equity release increased by 81% in the first half of 2018, compared to the same period in 2016
  • For every £1 of savings withdrawn via flexible pension payments in the last 12 months, 50p of housing wealth was unlocked via equity release
  • Number of equity release products available has more than doubled in the last two years; from 58 to 139

The increasing number of people using equity release has been linked to a number of factors, including:

  • Rising house prices
  • Longer life expectancy
  • Pressing social needs
  • Intergenerational lending
  • Mounting cost of care

What to consider before using equity release

1. What are the alternatives?

While equity release might seem like the only option, there are probably more. Before you jump in and start researching equity release products you should take a step back and ask what the alternatives are.

The obvious choice here is to downsize if you no longer need the space your current home offers. Other options may include asking family for support or looking into any state benefits that you may be entitled too.

Equity release might be the right option for you. But exploring the alternatives before making a decision is important. This is where we as advisers can add real value. We’ll help you look at the alternatives, taking a holistic view of your finances.

2. What are your other sources of retirement income?

If you’re struggling to balance the books in retirement, the first thing you should do is look at your current retirement income, not products for accessing more money.

It may be that you’re not getting the most out of your pension or other provisions. In some cases, evaluating your sources of revenue can help plug a shortfall in your income without having to give up property equity or take on more borrowing.

This is an area we can help you with. To understand how your retirement income streams are performing and your options for improving this, please contact us.

3. How much would you want to borrow?

You should have a clear idea about how much you want to borrow. And what you’ll use the money for.

If it’s to cover day-to-day costs, for example, it may be an unsustainable solution that will only temporarily solve your issues. Alternatively, if you want access to a relatively small lump sum, borrowing may be a better option.

4. What interest and fees will you pay?

Once you start looking at equity release products, these are two important factors to take into consideration. The average interest rate was 5.22% as of July 2018, according to the Equity Release Council. However, this can vary greatly between providers and will be dependent on your personal circumstances.

In addition, you may need to pay for advice and administration costs. Some administration and/or arrangement fees can be considerable, so it’s important to check. If you haven’t factored these in, it may mean equity release can be costlier than you first thought.

5. What happens if the property’s value decreases?

While the long-term trend has seen house prices rise, there is always the chance that the value of your home will decrease. If this happens, what would this mean for your equity release agreement?

In most cases, products come with a no negative equity guarantee. The ensures you don’t end up owing more than the value of your property. A ‘no negative equity’ guarantee is a valuable safeguard which should always be considered.  But this isn’t always the case. It’s important to carefully check what will happen in this situation if you’re not covered by a guarantee, even when you think it’s unlikely to happen.

6. Is your home suitable for the rest of your life?

If you’re taking out an equity release product, you should ask yourself if your home will be suitable for your future needs.

Some providers will allow you to move home after you’ve used equity release. However, this can make moving home more complex and isn’t always an option. If you choose to move to a property that’s worth less, for example, you may have to repay some of the equity release loan early.

As a result, thinking about how likely you are to want to move is crucial. Would your current property suit your needs if you were to become less mobile, for example?

7. How will it affect your legacy?

Your property is likely to be one of the largest assets you own. And, as a result, unlocking the money in it now will have an impact on the legacy you leave behind. If leaving your loved ones with an inheritance is important to you, equity release may not be the right option.

Should you decide to go ahead with an equity release product, it’s advisable that you speak to your family and other beneficiaries to explain your decision and how it will affect them. It is possible to ringfence a portion of your property, preserving it for inheritance, depending on the product type you choose. Another important factor to consider is that early repayment charges can be substantial. Consider these carefully before deciding on an equity release scheme.

If you’re struggling to balance your retirement finances and are considering equity release, we can help you understand what options are open to you. Please get in touch with us to take the first step, whether you decide to proceed with equity release or take another route.