Rising house prices have undeniably made it more difficult for the younger generations to get themselves onto the housing ladder. However, those who already own a home may have seen the value of their property rise significantly in recent years.
To access this value, there has been a rise in the number of homeowners using equity release to benefit from a cash injection from their property without the need to move.
Between April 2020 and June 2021, the Guardian report that £830 million was withdrawn from the homes of the older generation and gifted to family members.
But what is equity release, and could it be right for you? Read on to find out more.
Equity release allows you to access the value of your home while you still live there
Equity release essentially lets you take out a loan that is secured against your home while you still live there.
To be eligible for equity release, you must be over the age of 55 and must own your property. Depending on the product, you may not need to have paid off your mortgage.
There are two main types of equity release.
This allows you to borrow money at a capped or fixed interest rate. In most cases, the interest will continually build up and will be paid off along with the rest of your loan when you die or move into care.
That being said, there has been a rise in the number of lifetime mortgage options that allow you to pay off the interest early or, in some cases, the capital too.
This is where you receive a lump sum in exchange for selling a portion of your home. As an example, you may take out home reversion on 25% of your home. When the home is sold, the provider receives 25% of the proceeds, no matter whether the value has risen or fallen.
Lifetime mortgages are the more common of the two methods, though the one that you choose should be personal to your situation.
Neither type of equity release product tends to have monthly repayments, as the capital and interest are both usually paid back on your death or when you move into care.
With house prices rising, it’s clear to see why equity release is gaining traction. The ability to receive large cash injections without sacrificing any material products is attractive, especially when the money can be put to so many good uses.
Equity release could provide you with the finances you need when you need it
Equity release could offer your financial security when you need it most. If you have a necessary payment that you’re not sure you can afford, you need to adapt your home, or you need to raise money but don’t want to move home, it could be the solution you need.
Alternatively, any money you receive could go towards supplementing your own pension income. Which? report that, on average, a two-person household needs £26,000 a year to live a comfortable retirement, or £41,000 for a luxurious one. Once you’ve figured out the lifestyle you’d like retirement, you may need the extra funds to achieve your goals.
Equity release can also help you to provide funds for younger generations.
Out of the £830 million withdrawn by equity release, the Guardian research found that more than 50% was gifted to children or other family members to help them get onto the property ladder.
The money could also be used to help family members to make expensive home improvements, pay off a large debt, or to help supplement their university fund.
“Giving while living” can help your family to save money by cutting down on interest rates or rent payments. It can also ensure your family receive an inheritance now, when they need it, rather than when you die.
Gifting can also help you potentially avoid Inheritance Tax and allow you to see the positive impact your gifts may have on your family.
But equity release shouldn’t be taken lightly and does come with potential drawbacks.
Interest costs and other drawbacks of equity release
While the ability to borrow money without having to make a monthly repayment may seem attractive, it’s important to remember that interest will still accrue on your loan.
Under most equity release schemes, the interest “rolls up”, meaning that it is paid back when the property is sold. If the borrowing lasts for many years, this interest can be significant and can eat into any inheritance your family may have been expecting to receive from the sale of your home.
This is why it’s always important to discuss equity release with your family if it’s something you’re considering.
When thinking about equity release it’s important to find a lender with a “no negative equity guarantee”. This ensures that you will never owe more than the value of your home, even if a significant amount of interest has accrued over many years.
It’s also worth considering that equity release typically works better for older clients. According to the Equity Release Council, the average age of a new customer currently stands between 68 and 70. If you take out a loan at age 55, you may only be able to borrow a small proportion of your home’s value, and interest may accrue over many decades.
Additionally, equity release products are often more expensive than standard mortgages. There may be more traditional types of mortgage that suit your purposes.
Finally, if you are in a position to repay your loan early, you may find you have to pay “early repayment charges” to your lender. These may occur when you repay part or all of the loan before a specified date.
Contact a financial adviser to ensure you make the right decision
Any large financial decision should be made with the help of a professional, but this is especially true for high-risk decisions such as equity release.
A financial adviser will be there to help you understand your financial situation in the context of equity release, and to walk you through your options and possible outcomes.
If you want to talk to us about equity release and whether it could be the right option for you, feel free to email firstname.lastname@example.org or call us on 0207 808 4120 to find out more.