POSTED 02 March 2018 Mortgages

Equity Release - What is it and How does it Work?

Has your income stalled as you’ve got older, while the value of your house has rocketed? If so you might be considering signing up for equity release.

How does it work?

Equity release allows you to release money tied up in your property, without moving house. There are two types of scheme:

  • Home reversion -  where a finance company buy part or all of your house in exchange for a lump sum or regular payments
  • Lifetime mortgage - where you retain ownership of your home but take out a loan against it, paying the interest as you go or rolling it up to be paid later.

In both cases you continue to live in your home until you die or move into full time care.

The Equity Release Council (previously ‘SHIP’) launched in 2012 to safeguard consumers and represent professionals in the industry, so many of the horror stories on the internet no longer apply. 

However, some claim equity release is still too good to be true; we consider the arguments for and against to help you decide whether equity release is for you.

interest 

The No Negative Equity Guarantee

Often quoted as a measure of how services have improved, members of the Equity Release Council abide by the No Negative Equity guarantee, which promises your loan plus interest will never be more than the value of your home.

This protects you if the value of the property falls; even if the sale of your house doesn’t cover the loan, the debt is wiped and not passed on to your dependents.

Critics say that compound interest on the loan means consumers are still paying exorbitant prices, particularly as equity release is available to those aged 55, giving interest plenty of time to accumulate.

Releasing £100 000 on a home worth £300 000 and paying 5.4% interest would mean that after just 21 years, there would be nothing left for your dependents. The industry’s argument is that house prices tend to rise, which offsets this.

Of course, if you have no dependents, there is no argument and equity release may seem ideal!

Alternatives

Critics of equity release argue that the best way to release the equity on your home is to sell it and buy somewhere less expensive.

Downsizing once children have left home, or to somewhere with better access to local amenities, may reap other benefits for some older people, as well as the obvious one - you get to keep all the profits! Other alternatives include renting a room in your house, or asking family for financial help.

grandparents

Flexibility

Equity release lending was higher than ever in 2017, with loans totally over three billion pounds. Seventy-one percent of new customers opted for a lifetime mortgage, which supporters say is due to their flexibility; you can ‘draw down’ funds as you need them, and repay more as it suits you.

This allows older people to access extra cash for a wide variety of reasons such as increasing retirement income, funding the grandchildren through school, or even repaying the mortgage. However, with only around 0.5 % of qualifying homeowners choosing it, others argue that equity release it still a last resort and not a route to easy money.

So if you are unconcerned about leaving money behind, or are looking for a short term loan, equity release could work in your favour.

That said, make sure you have considered the alternatives, speak to an independent financial advisor, and ensure those you approach are members of the Equity Release Council, who are there to protect you.