What happens if you reach the age of retirement, and you don’t have enough money saved in a pension, or elsewhere, to give up work and maintain the lifestyle you want? Is there another way you can find the cash you need?

One solution that you may consider, if you own your own home, is equity release. Let’s explore what equity release is, and its pros and cons, so you can decide if it might be for you. 

What is equity release?

Equity release is a way of taking money out of your home, while you still live in it. It’s usually only available to people over the age of 55. 

Unlike downsizing, in which you sell your property to buy somewhere cheaper, equity release enables you to keep your home through refinancing. The money you release from your home through equity release is tax-free as it’s considered a loan, rather than income, and can be used for almost anything. 

People often use the money to supplement their retirement income, help children with deposits for their own properties, pay for home improvements, or to enjoy a more comfortable lifestyle.

The concept of equity release is that you are borrowing against the value of your home or selling a portion of it. But unlike a traditional mortgage, you don’t need to make regular repayments. The amount you owe, or the share you give up, is usually repaid when you die or move into long-term care, at which point your property is sold.

The two main types of equity release

There are two main types of equity release in the UK: lifetime mortgages and home reversion plans. Each one works differently, and the right choice for you will depend on your personal circumstances.

1) Lifetime mortgages

Lifetime mortgages are the most common type of equity release. Essentially, they are a loan secured against your home. You keep full ownership of your property, and the loan is repaid when the home is later sold.

Here’s how lifetime mortgages work:

• You borrow a percentage of your home’s value, usually between 20% and 60%. The amount you can borrow will depend on your age and health, the older you are, the more you should be able to borrow.
• Interest accrues on your loan, and because you don’t make any monthly repayments, the interest compounds over time. As a result, the amount you owe can increase fast.
• Some lifetime mortgages allow you to make voluntary repayments (of capital or interest), which can reduce your overall debt. 
• Other lifetime mortgages can include a ‘drawdown’ option, which allows you to release money in stages, rather than as a single lump sum.

2) Home reversion plans

With home reversion plans, you sell a share of your property to a provider in exchange for a lump sum or regular income. Here’s how they work:

• You sell a percentage of your home’s value – for example, 40%. In return, you receive cash but keep the right to live in your home rent-free for the rest of your life, or until you move into long-term care.
• When you die, or go into care, your property is sold and the proceeds are split according to the ownership shares.
• One downside to home reversion plans is that you don’t receive the full market value for the share of your home you sell. This is because your provider won’t see a return until the end of your plan. So they pay less than the market value upfront.

Who can apply for equity release?

You usually need to be at least 55 to quality for a lifetime mortgage, and 60 or 65 for a home reversion plan. In oder to apply for either you need to own your home outright or have only a small mortgage balance remaining (this can usually be paid off with the money you release). Your property must also meet the provider’s criteria in terms of value, type, and condition.

Your health and lifestyle will impact how much money you can release. For example, some lenders offer enhanced plans that allow people with particular medical conditions to release more equity.

The pros of equity release

So what are the benefits of equity release? Here are some pros to consider:

• You can stay in your home: Unlike downsizing, you don’t need to move.
• You get tax-free cash: The money you release is tax-free.
• You can use the money any way you wish: You can choose to boost your retirement income, clear your debts, or help out family.
• You can protect your beneficiaries: Plans that are regulated by the Equity Release Council (ERC) include a “no negative equity guarantee,” which means you will never owe more than your home is worth.

The cons of equity release

Are there any downsides to equity release? Here are some cons to think about:

• Your interest compounds over time: The interest on lifetime mortgages can significantly reduce the value of your estate.
• You can reduce your inheritance: With part of the value of your home going to repay your loan or provider, you will probably leave less to your heirs.
• You could pay early repayment charges: Exiting an equity release plan early can be expensive.
• You can impact your right to benefits: Receiving a lump sum could affect your entitlement to means-tested state benefits.
• You have less flexibility: It’s not easy to reverse equity release if you change your mind later on or your circumstances change.

What are the alternatives to equity release?

Equity release isn’t right for everyone. Here are some alternative options you might want to consider exploring:

• Downsizing: You can release capital without accruing debt by selling your current home and moving to a smaller, cheaper one.
• Retirement interest-only mortgages: With a retirement interest-only mortgage,  you pay monthly interest payments, which means you don’t roll up interest like a lifetime mortgage.
• Using other savings or investments: If you need a lump sum – perhaps to pay for home repairs or clear debts – it might be more cost-effective to take money from your pension or an ISA, if you have one. 

Could equity release be right for you?

Equity release has had some bad press over the years, usually due to misconduct in the sector. And while it can be tempting to access the money tied up in your home to use now, it’s important to do thorough research and think carefully before making a decision. 

Remember: equity release reduces the value of your estate and can be expensive in the long run. It’s also difficult and expensive to reverse. 

If you do feel like equity release is an option for you, make sure you get independent financial advice and choose a provider regulated by the Equity Release Council to ensure that the right consumer protections are in place.