Releasing equity from your home

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"Equity release products are risky. You could end up owing more than the value of your home."

"Equity release products are risky. You could end up owing more than the value of your home."

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Most companies offering equity release are members of the Equity Release Council. Members must comply with the Council’s requirements. One requirement is a ‘no negative equity’ clause. This means no one can end up owing more than the value of their home when it is sold following death or moving into long-term care.

Your home can be a valuable source of income to support your life after work. There are different ways to do this, and the two most popular downsizing and equity relase. 

Examples of equity release include a lifetime mortgage and a home reversion plan.

With a lifetime mortgage you take a loan against the value of your home. You don’t have to repay anything until you (or both of you if borrowing jointly) move permanently to a care home or you die. When this happens, the property is sold and the loan, plus the interest owed, is repaid.

A home reversion plan means you sell all or part of your home (at less than market value), and in return you’re paid a lump sum or regular income. You have the right to carry on living in the house rent free, or for a fixed rent, until you die or move out.

If you’re not comfortable with these options, you could raise money by taking in a lodger. By renting a furnished room in your main residence, you can take advantage of the Rent a Room scheme. So any income you earn in renting out the room is tax-free up to £7,500 per year.

How can I use equity release during my life after work?

You can use equity release at the point you retire to boost your income, or you can use it if you need a lump sum during retirement. Alternatively, you may be able to use it to fund care needs later in life or as a backstop against unexpected expenses.

However, before choosing equity release you should remember that:

  • It will reduce the amount you could otherwise leave to your loved ones.
  • You could lose entitlement to means-tested benefits.
  • The interest you pay on a lifetime mortgage is usually higher than a conventional mortgage and is fixed for the life of the loan. It’s added to the loan each year, so the amount you owe builds over time. If you choose not to make regular interest payments during the life of a lifetime mortgage loan, the amount you owe can grow rapidly.
  • With a home reversion plan, the amount you’ll receive for the share of the property you sell will be significantly less than the market value.

Is equity release regulated?

We’ve mentioned some of the risks of equity release above, but there are some safeguards in place to help protect borrowers.

Most equity release providers are members of the Equity Release Council. This means products must meet certain standards. These include:

  • No negative equity guarantee. Whatever happens to property prices you will never have to repay more than the value of your home when it is sold following death or moving into long-term care.
  • Right to remain. You have the right to stay in your home for life or until you move permanently into a residential care home.
  • Portability. You can still move house as long as the new home is acceptable to the equity release provider (there are some types of property providers will not lend against).

Equity release products are regulated by the UK financial watchdog, the Financial Conduct Authority, an independent organisation that regulates the financial services industry.

Do I qualify for equity release?

Most people who’ve retired with a property they own should qualify.

Different equity release providers have different criteria they apply when assessing if a customer can take out equity release – however, in the main, you should be eligible for equity release if:

• You are a homeowner in England, Scotland, Wales or Northern Ireland and it's your main residence

• Your property is worth £70,000 or more

• You are aged 55 and over

If you already have a mortgage, you will need to repay this when you take out an equity release plan. You may be able to use the funds released to do this, but using equity release to repay an existing mortgage may cost more in the long-term.

Is downsizing a better option?

For some people downsizing could be the right option, but there are a few things to take into account:

Don’t overdo it. Bear in mind you may still need spare bedrooms for grandchildren to stay, so don’t overdo it when you downsize.

Make it worthwhile. There will be costs in buying and selling and you may need to buy new furniture or make alterations to your new home. Make sure you release enough equity to cover any costs and still have a reasonable pot of money left to help with your life after work.

How do you feel about it? Often people think about selling their home when they retire but, when the time comes, it can be emotionally difficult to sell the family home.

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