What Exactly is Equity Release?
Equity release programmes allow you to access the value of your home in retirement for more income - but equity release is an expensive, permanent commitment.
Equity release may seem like a good option if you have a pension shortfall or an unexpected bill. It enables you to access the riches you've amassed in your house without having to relocate.
What will the cost of equity release be for me?
Equity release is not cheap. After 15 years, a lifetime mortgage might cost more than twice what you borrowed, while some home reversion schemes demand more than 70% of your house's worth for only a 20% advance.
Although the Bank of England's base rate remains very low (though rising) and standard mortgage rates have been lowered, lifetime mortgage rates (the most popular type of equity release) remain relatively high.
Although average rates have dropped in recent years (from 6.2% in January 2016 to 4.22% in February 2022), equity release remains prohibitively expensive when compared to a normal mortgage.
The Which? Money Helpline offers a team of certified professionals that can assist you with your equity release questions. Sign up for a Which? trial and speak with one of our experts.
What are the various kinds of equity releases?
There are two types of equity release: lifetime mortgages, which allow you to borrow money against your property, and home reversion, in which you sell a portion of your home.
Mortgages for life
A lifetime mortgage allows you to borrow a percentage of the value of your property. The money is charged interest, but nothing is normally required to be paid back until you die or sell your house.
Because interest is compounded or "rolled up" during the life of the loan, your debt may quadruple in 15 years at present rates.
Schemes for home reversion
A home reversion scheme typically involves selling a portion of your property to the supplier for less than the market value. If you like, you can live in your home for the rest of your life.
When you die or enter long-term care and the property is sold, the provider receives the same percentage of the sale price as payback.
For example, if you sold the provider 50% of your property, it would receive 50% of the sale price.
Some lifetime mortgages are accessible to people as young as 55, but house reversions are only offered to people 65 and up. Some upgraded products provide better terms if you are a smoker or have health issues that may reduce your life expectancy.
The benefits and drawbacks of equity release
It is occasionally advisable if:
- You don't have any other retirement savings or income.
- You do not want to or are unable to downsize.
- You're fine with lowering the family's fortune.
- This is the greatest option, according to an IFA.
However, if you choose it:
- Unless you make payments, your debt will grow owing to compound interest.
- Your benefits may be compromised, and you may be charged for early repayment.
- You cannot leave your entire home as an inheritance.
- You will not be able to obtain another loan against your home.
Alternative possibilities
With more mortgages becoming available to older borrowers, equity release may no longer be your only choice.
If you own your home outright, you may discover that getting a mortgage on it is a more cost-effective option.
Alternatively, if you have a mortgage, you may be able to release more funds by remortgaging to release equity.
Downsizing to a smaller home or relocating to a less expensive area may help you pay off your mortgage and earn some cash. Finding a suitable house in a desirable neighbourhood can be difficult.