Worried about how much you’ll have to live on once you retire?
It’s a concern for many people, especially if you don’t have savings or a large private pension.
You might decide to unlock some of the cash tied up in your home to help with living expenses during retirement.
Equity release schemes are a popular alternative to selling up and downsizing. But they’ve had bad press in the past and arguably involve some big risks.
Sarah Coles, Personal Finance Analyst at Hargreaves-Lansdown, says: ”Equity release schemes have a chequered past and still struggle with their reputation.
"However modern schemes which follow the guidelines of the Equity Release Council have considerable protections, including ‘no negative equity’ guarantees.”
A no negative equity guarantee means that you'll never owe more than the value of your property when it's sold.
So if the value of your house went down while you lived there - to the point where it no longer covered the amount you owe, the remainder of the loan would be written off.
All plans approved by the Equity Release Council must offer this promise.
1. What is equity release and how does it work?
There are different ways to release money tied up in your home if you’re aged 55 or above.
The two most common are lifetime mortgages and home reversion plans.
Lifetime mortgages
A lifetime mortgage is the most common form of equity release.
If you take one out, it means you borrow a percentage of your home’s value from the bank. It will be given to you as a lump sum or a series of lump sums.
Usually, your previous mortgage will be fully paid off.
With a lifetime mortgage, you will still be charged interest on the loan. But instead of having to pay it each month, it’ll be added on to the amount you have borrowed.
The whole amount will then be paid off when your home is sold.
This means that the amount you owe will increase every month.
For example, if you borrowed £200,000 against a home worth £250,000, you might be charged 3% interest, which equates to £500 a month.
You won’t pay this interest monthly, but when you come to sell the home 10 years later, you might end up paying back £200,000 plus £60,000.
If you stay in your home for many years after taking out a lifetime mortgage, you could end up owing more in extra interest than the home is worth. This is called negative equity.
Equity release schemes should come with “no negative equity” guarantees. Make sure you know what you're getting into by reading the small print.
Home reversion plan
A home reversion plan is where you sell off all or a chunk of your home to a company but continue to live there.
In exchange, the home reversion company will either give you a lump sum or an income.
You’ll usually only get 30% to 60% of the market value of your home, because the deal is you get to continue living in the home.
The market value percentage you get goes up the older you are.
This might sound good, but it’s actually really costly for you. You’ll only usually get a fraction of the value of the chunk you’re selling.
Then, when your home is eventually sold, the home reversion company will take the value of the percentage of your home they own in the sale.
For example, if your house was worth £200,000, and you sold half of it to a company, they might offer you £50,000, rather than the full £100,000 it's worth.
If the property value then later rose to £250,000 when you came to sell it, the home reversion company would still take a 50% stake in the property, so they would take £125,000.
It depends what you mean by safe. Equity release schemes like lifetime mortgages and home reversion are legitimate.
But that doesn’t mean they’re necessarily the right option for you. They offer the option of staying in your home, but they could prove overly expensive in the long term.
Yes you can sell your home. But it is at this point that a lifetime mortgage will need to be repaid in full, including interest.
If you’ve sold part of your home through a reversion scheme, the company who bought it will take their percentage stake when you sell up.
In both cases, it’s possible there won’t be much equity left when it’s time to sell. You might even be in deficit if the cost of interest on a mortgage has added up.
2. Is equity release a good or a bad idea?
In the right circumstances, equity release can work. But for most people, the additional costs outweigh the benefits of other options, such as downsizing.
It’s worth considering both sides:
| Pros | Cons |
|---|---|
| You get to stay in your home. | The interest added to a lifetime mortgage can have a big effect on the sum you owe to the equity release company. |
| You get to enjoy the money that has been sitting in your home. | The money you release could mean you’re no longer entitled to means-tested state benefits like pension credit and council tax benefit. |
| There could be tax benefits. When your inheritance tax bill is eventually calculated, the mortgage and any interest is subtracted from the value of your property. | There might be nothing left to leave your loved-ones once you sell your home. |
3. Should I release equity from my home?
Equity release isn’t the most affordable choice to release cash.
Being able to stay in your home may seem like a real bonus to begin with. But the situation might feel like a far less attractive option later.
Moving to a smaller home or more affordable location could be a better option for you to help with your cash flow.
As always, you should talk to loved ones and be sure to get independent advice when making a big financial decision.
Thinking of selling?
Get the ball rolling with an in-person valuation of your home. It’s free and there’s no obligation to sell if you change your mind.
