Equity release is a way that you unlock the equity (cash) tied up in your property while you still live there. Homeowners can opt to take cash in a lump sum or they can receive cash in smaller instalments over time.
It sounds desirable for those who are asset rich and cash poor, but equity release is not something that should be taken lightly.
Naturally releasing equity from the home means that there will be less inheritance for family, but of course, homeowners may wish to prioritise their own finances.
There are two main schemes, as explained below. Read on to find out more about equity release and the pros and cons.
A lifetime mortgage allows you to borrow money that is secured against your home. With a lifetime mortgage unpaid interest is generally added to the loan, however there are some equity release mortgages that will allow homeowners to pay interest as they go.
Pros of lifetime mortgages
You can access equity tied up in your home. This can be used to pay for things like care, which can take pressure off family members.
Once you’ve got an agreement you have guaranteed cash
You can stay in your home
Equity released is tax free on your main property
Equity release can reduce inheritance tax
You only have to repay if you die or sell the property
Cons of lifetime mortgages
With interest mounting up, the equity release mortgage can lose its appeal to some, as it can put people in debt. To protect yourself and your family from debts look for a ‘no negative equity guarantee’.
There may be a limit on how much equity you can release, which can make equity less desirable if you need more cash than you can get.
The interest rate is typically 5%, but it can be lower.
Arrangement fees can cost £1,500 – £3,000
Inheritance will be reduced
You have to have builders insurance
The other option is home reversion. Home reversion allows you to sell your home (or part of it) to a home reversion provider. By doing this homeowners receive a lump sum or regular payments. Generally the home is sold for less than the market value, but you are able to stay on as a tenant.
Pros of home reversion
If you agree to maintain the home you can continue living in the home, rent free until you die
Once agreed you will have cash
This equity scheme also reduces inheritance tax
You can choose to sell a part of the property, keeping some equity in the house.
Cons of home reversion
If you sell 100% ownership there will be nothing left for inheritance for family members
Home reversion could impact tax, benefits and inheritance
This scheme is better suited to people who are older. For example, those over 70 are more likely to get a figure closer to the market value
Inheritance will be reduced
You will not own the entirety of your house and you could potentially own none if you choose to sell it all
Ending a plan early will mean that you buy the house back at market value which will be less than it sold for
You will still need to maintain the house
Alternatives to equity release
Before jumping into equity release it’s important to consider all of your options, which might include:
Downsizing the home
By downsizing your home you can buy a home that costs less than the equity in your existing home. This will enable you to keep any unspent cash. You can even opt for online estate agents to save on estate agent fees.
Renting out a room to provide an additional income
You can rent a room on AirBnB or spareroom.com. This will provide a secondary income to help pay the bills. It also has the added benefit of company and an extra pair of hands around the house!
If you’re thinking about getting a loan you could remortgage your house instead. This is likely to provide you with more money, but it may be that it’s more difficult for older people to remortgage.
Applying for a bank loan
For those who need a smaller amount of cash, the bank loan can be a suitable next step.
Sell your house fast for cash
The final option is the fast property buyer, like us. We buy any house for cash. Similarly to options provided by equity release schemes, selling your house fast for cash usually means selling for a price lower than market value. On the plus side there won’t be any estate agent fees, we make the process so simple and it’s a guaranteed sale.
We can work as fast as you like, putting cash in the bank within 7 days in some cases.