As people look to organise their finances in later life, equity release schemes factor as a potential avenue.
After a bumper year for equity release in 2022, the number of customers taking out equity release products and the amount of money unlocked returned to familiar levels in 2023, with 64,448 active customers taking out new or extended products at a total lending of £2.61 billion.
In this guide, we’ll look at what equity release is, how it works and some of the benefits and drawbacks if you’re weighing up whether it is the right approach for you or not.
What is equity release?
The equity in your home is the value of it minus any outstanding amount on your mortgage or other debts secured against it.
There are four types of equity release schemes that work in slightly different ways.
- Lifetime mortgage
- Payment-term lifetime mortgage
- Interest-payment lifetime mortgage
- Home reversion
Eligibility for equity release schemes in the UK depends on two factors:
- You are a homeowner aged 55 or over
- Your house is worth more than £70,000
You must also consult with a professional advisor before taking out any equity release product to make sure that it fully meets your needs and situation.
The benefits of equity release
- Tax-free cash: Any funds that you do release from your home are not taxed, so you keep every penny.
- Payment flexibility: With most schemes, you can alter your repayments to suit your situation – sometimes even making no repayments.
- No negative equity: Most schemes come with a guarantee that you or your loved ones will not owe more if your house value falls to a level lower than your repayment total.
- Own your home (or sell it): Except for home reversion, you will retain ownership of your home and can sell it in the future if you wish – although you will need to repay the scheme.
The drawbacks of equity release
- Compound interest: Equity release products are loans taken out against your home and interest will grow, on top of the amount that needs to be repaid.
- Limits future financial flexibility: You may not have any equity remaining in your home if you take out one of these products, leaving you short if you do look to move house again or require future help.
- Reduce the value of your estate: Your loved ones will have a smaller inheritance if you take out equity release as it will need to be repaid if your house is sold once you pass away.
What can equity release be used for?
If you decide that equity release is for you, there are no limits on what you can use the funds for.
- Consolidating debts, or repaying your current mortgage off
- Supporting family and friends, for example, paying tuition fees for a grandchild
- Boosting your retirement pot, helping you live life after work on your terms
- Make home improvements
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