Equity release: How does it work and is it right for you?

Your home may be one of your most valuable assets. So, once your children have flown the nest and you’ve left working life behind you, releasing some of the capital tied up in your property might seem like an appealing option.

Whether you want to fund ambitious retirement plans for travel, or help your children and grandchildren get onto the property ladder, equity release could allow you to access the money you need.

Indeed, research published by Mortgage Solutions has revealed that equity release is increasingly being used by high net worth individuals. Figures show that in 2023, there was an uptick in applications from homeowners with property valued at £250,000 to £549,999.

Understanding how equity release works and learning about the potential pros and cons could help you decide if it’s the right option for you.

If you’re aged 55 or over, equity release could allow you to access the cash tied up in your home

The “equity” in your home is calculated by deducting your outstanding mortgage balance from the property’s current market value. For example, if your property is valued at £450,000 and your remaining mortgage balance is £100,000, you have £350,000 equity.

Equity release is a means of accessing or “releasing” some of this money without selling your home.

Research by Canada Life has revealed that the top reason given by homeowners for releasing equity (41%) in 2023 was to clear an existing mortgage, while funding home improvements was the second most popular reason (28%).

Whatever your motivation for releasing some of the cash tied up in your property, you’ll need to ensure that you meet the eligibility criteria set by your lender. This can include:

  • Your age – Equity release is usually only available to those aged 55 or over. Some lenders require applicants to be at least 60 years old.
  • Property ownership and location – You must own a property in the UK, and it must be your main residence.
  • Property condition and value – Your home must meet a minimum value set by the lender and it needs to be in good condition.
  • Type of property and construction Some properties may not qualify, for example, park homes and properties of “non-standard construction”.

This is not an exhaustive list, and criteria will typically vary between lenders, so you may benefit from speaking to a financial planner who can help you understand your options.

How equity release works

If you meet your chosen lender’s eligibility criteria, they will provide either a cash lump sum or an income in exchange for part of the value of your home.

The most popular way of doing this is to take out a lifetime mortgage. Part of the equity in your home will be released as a lump sum and you’ll usually repay the loan when you die or move into long-term care.

Normally, there will be no regular repayments to make and the interest rolls up over the course of your loan, so the final balance will include the original amount you borrow plus the interest.

Alternatively, you could opt for a home reversion, which allows you to sell part of your property to the mortgage lender and receive a lump sum while retaining the right to live there until you die or move into long-term care.

Potential pros of equity release

  • You can stay in your home – If you’ve been in your home for a while, it may hold a lot of memories for you. So, equity release may be a more attractive option than downsizing, as it could allow you to enjoy your retirement and later life in your own home while also freeing up the cash necessary to meet your needs.
  • You’ll receive a tax-free lump sum or income – The value you release from your home is exempt from Income Tax and Capital Gains Tax, meaning you can benefit fully from it.
  • You could use the equity you release to reduce a potential Inheritance Tax bill – You might want to give some or all of the money you release to loved ones using your annual Inheritance Tax (IHT) gifting allowances and exemptions. This could potentially reduce the value of your estate for IHT purposes. You could also take out inheritance protection to ringfence part of your property to pass on. However, the more that is protected, the less is likely to be available to you as equity release.
  • You won’t have to make monthly repayments – Usually, no repayments are due until you die or enter long-term care. Although you may choose to pay off the interest as you go to reduce the final balance due.
  • You may be protected from negative equity – If you take out a lifetime mortgage with a member of the Equity Release Council, you’ll receive a “no negative equity” guarantee, which means that you’ll never owe more than the value of your home.
  • You could retain ownership of your home – You’ll still own your home if you opt for a lifetime mortgage, and so could benefit from any subsequent rise in the value of your property. If you choose a home reversion plan, you will no longer own your home, or you may only own part of it.

Potential cons of equity release

  • Your debt might increase – Interest rates are often higher for equity release mortgages and the interest typically rolls up and compounds over the loan’s lifetime, meaning that you’ll pay interest on interest, which can snowball rapidly. This could significantly increase your debt and substantially reduce the inheritance you could pass on to your loved ones.
  • Not everyone qualifies for equity release – You must meet the criteria around your age and property, as detailed above.
  • You could lose certain means-tested benefits – The lump sum or income you release may push you over the threshold for benefits such as Pension Credits and Council Tax reductions.
  • You might incur various costs – A property valuation will be required to determine the amount of equity that can be released, and this cost is likely to fall to you as the property owner. Additionally, you may be required to pay an early repayment charge to your current lender if you still have a mortgage, as well as solicitor fees for processing your application.

There is a lot to consider when deciding whether equity release is the right choice for you. Ultimately, it will depend on your lifestyle requirements and what you need the money for.

You might want to consider alternative options, such as downsizing to release the money you need. Or, if you can afford the monthly repayments, a traditional mortgage might work out to be more cost-effective than equity release.

A financial planner can help you explore your options and review whether these align with your long-term financial plans.

Get in touch

If you have further questions about incorporating equity release into your long-term financial plan, we can help.

Please get in touch either by email at helpme@aspirellp.co.uk or by calling 0117 9303510.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

Equity release will reduce the value of your estate and can affect your eligibility for means-tested benefits.

A lifetime mortgage is a loan secured against your home. To understand the features and risks, ask for a personalised illustration.

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