Equity release offers an opportunity to unlock capital otherwise tied up in a home on which your mortgage has been repaid, freeing you to spend the proceeds on making your retirement more comfortable, splashing out on some of the luxuries you might always have wanted, or passing on an early financial legacy to your children.
Nevertheless, equity release may not be appropriate for everyone. Here are some of our top ten tips and pointers to take into consideration when weighing up your decision …
1. Choose the type of equity release
- although you may sell a share or the whole of your property and rent it back from an equity release provider through a home reversion arrangement, the more popular – and probably more straightforward – form of equity release is a lifetime mortgage. The differences between the two are outlined in guidance from the Money Advice Service.
2. Repaying your interest-only mortgage
- equity release may provide the solution to the dilemma faced by some homeowners who come to the end of their interest-only mortgage and realise that they have insufficient funds to make the required, final capital repayment.
- as the BBC reported on the 30th of January 2018, the Financial Conduct Authority (FCA) is already concerned about the number of interest-only mortgage holders who may be faced with such a problem – and, if you are one, equity release may avoid you having to lose your home.
3. Age qualifications
- lifetime mortgages are typically available only to those over the age of 55 – 60 in some instances.
4. Interest rates
- the rate of interest attracted by a lifetime mortgage may be fixed or variable – with the former naturally giving you a greater sense of certainty and security.
- if the rate is variable, standards imposed by the industry regulator the Equity Release Council (ERC) mean that the maximum rate of interest is capped throughout the term of the lifetime mortgage (i.e. until your home is sold or until you move into long-term residential care).
5. Living in your home
- choosing a provider regulated by the ERC also ensures that you retain the right to continue to live in your home until it is sold when you move into long-term residential care.
- the property must continue to be your principal place of residence, and you must adhere to any other terms and conditions of the lifetime mortgage contract.
6. No negative equity guarantees
- make sure that any equity release contract also contains a clause guaranteeing that there will be no negative equity – when the market value of your home falls below the amount of the outstanding lifetime mortgage.
- this guarantees that when the property is sold – and solicitors’ and agents’ fees have been paid – there is sufficient to repay both the accumulated interest and the capital of your lifetime mortgage.
7. Repayment of interest
- compare equity release plans to see whether you are able to make early repayment of any of the interest on your lifetime mortgage – so reducing the outstanding balance that needs to be repaid when the property is sold, if you move into long-term care.
- depending on your planned use of the proceeds, you might want to be able to choose drawing down your agreed equity release in smaller, phased amounts, so reducing the amount of interest otherwise payable on the total sum.
9. The value of your home
- as you compare equity release plans, you may discover that providers insist that your home has a current market value of at least £70,000 – some providers may impose a higher limit.
10. Existing mortgages and loans
- if there are existing mortgages or loans secured against your home, equity release may still be possible, but that current borrowing must first be repaid.
Equity release is not a panacea suitable for everyone. But it may provide a way of unlocking the considerable amount of capital that may be tied up in your home, yet still allow you to live in it. Equity release schemes are many and varied, with sufficient flexibility and inbuilt security to provide an additional source of income in your retirement or to pay off outstanding debts – such as the major capital repayment of your interest-only mortgage.
Use our free online equity release calculator to see how much equity could you release.
Further reading: Equity release FAQs.
Equity Release Schemes
Not for everyone, but they could be for you