A guide to understanding equity release

Equity release allows homeowners aged 55 and over to unlock the wealth tied up in their property. While it can provide a useful tax-free lump sum, equity release also has downsides like reduced inheritance and interest rolling up.

That's why it's critical to fully consider alternatives like downsizing, remortgaging, home equity loans or using savings that may better suit your needs and situation before committing to equity release.

This detailed guide will provide an overview of how equity release works, outline the pros and cons, and explore the various alternatives.

We'll look at both the advantages and disadvantages of options like downsizing, remortgaging, home equity loans and utilising existing savings and assets. Understanding these choices allows you to make a properly informed decision on the best route to releasing funds from your home if needed.

Understanding equity release

Equity release lets homeowners over 55 access property wealth without having to move house. There are two main types:

• Lifetime mortgages - This is a form of equity release mortgage where you borrow money against your home. The loan plus any accrued interest gets repaid when you die or move into long-term care.
• Home reversion plans - You sell all or part of your property, usually at below market value, in return for a tax-free lump sum or income stream. The sale completes when you pass away or move into care. LiveMore do not offer home reversion plans.

To qualify for equity release you must own your home and be aged 55 or over. The amount you can borrow or sell depends on your age and your property's value.

Please note: Unlike lifetime mortgages, LiveMore do not offer home reversion plans.

With lifetime mortgages, no repayments need to be made - the debt rolls up over time as interest gets added annually or monthly. This accumulating interest can significantly reduce the value left to your estate. Some products allow payments to be made which will reduce the final amount owed.

Why does equity release have a bad reputation?

Equity release is sometimes viewed negatively because:

• Your inheritance reduces over time as debts grow through compounding interest roll-up.
• It can be an expensive way to borrow money if not used wisely. The roll-up of interest plus fees can make costs mount quickly.
• Some borrowers feel "trapped" in unsuitable properties if equity release makes downsizing difficult later.
• There's a risk of your property falling into negative equity if house prices drop, leaving debts greater than the value. However, equity release providers who are members of the Equity Release Council have a No Negative Equity Guarantee, which means your estate will never owe more than the property is worth when it is sold.
• In the past, some older homeowners have been mis-sold equity release or scammed into unsuitable schemes.

What are the alternatives to equity release?

Rather than opting for equity release, you may want to look at alternative options to unlock housing equity. What suits you best depends entirely on your specific circumstances, needs and objectives.

Downsizing

Selling your current home to move to a smaller, lower-value property is a very common way to release equity.

Pros:

• Access to a large tax-free lump sum from the proceeds of selling your existing property.
• Reduced running costs by moving to a smaller home that's cheaper to maintain.
• The funds are released immediately on completion of the sale and purchase.

Cons:

• The stress of going through the process of selling your current home and moving your possessions.
• Having to part with treasured possessions that won't fit into the new property.
• A smaller home may be less suited to adapting as your care needs grow.

Downsizing can provide funds to help with costs in retirement via a lump sum when moving to a less valuable property. Many downsize to a more manageable property better suited for later life needs, perhaps in a different area, or nearer family.

For these reasons, downsizing should be considered before taking out an equity release plan. But for some, the emotional upheaval of moving home deters them from downsizing.

Remortgaging

Remortgaging involves switching your existing mortgage to a new deal. This can enable you to release equity from your property.

Pros:

• It allows you to access tax-efficient cash in a controlled way.
• You spread the costs by making monthly repayments on the new loan.
• It may allow you to get a lower interest rate than your current mortgage deal, but in the current market (2023) remortgaging will usually mean a higher interest rate.
• If your property is unusual, it may be easier to remortgage. The property criteria will vary by lender (and product), but in general, equity release plans are more restrictive in this area.
• As equity release plans do not require payments, the acceptable loan to value thresholds (LTV) are lower than on a standard mortgage. What this means is that you may be able to release more funds by remortgaging, than with a lifetime mortgage (equity release).

Cons:

• You take on a responsibility to meet monthly repayments on the new loan.
• The amount of equity you can release will be far less than the full market value.
• Increasing the mortgage could extend payments into retirement.
• Your income in retirement will be assessed, which may be lower than your past employment income, so will affect affordability and the amount you can borrow.
• Some mortgages will have a shorter-term end and will need to be remortgaged on this date.

Home equity loans

Home equity loans, also known as second charge mortgages, allow you to borrow against your property over a defined term like 5-10 years.

Pros:

• Allow you to access a lump sum without having to move house.
• You pay off the loan and interest within the set term.

Cons:

• The loan must be fully repaid at the end of the term.
• Your home is at risk of repossession if you default on repayments.
• Less equity can usually be released compared to lifetime mortgages.

Home equity loans offer short-term access to funds secured on your property. However, the need to make monthly repayments makes them less flexible than lifetime mortgages.

Savings and investments

Using existing pensions, savings or funds invested in other assets avoids taking on expensive debt against your home altogether.

Pros:

• You avoid borrowing and the costs of interest roll-up or repayments.
• Money in ISAs provides tax-efficient income and gains.
• Pensions offer flexibility to draw down funds as needed.

Cons:

• The amounts available may be more limited compared to equity release.
• Pension access is restricted before age 55.
• Reduces reserves you've built up to cover future costs.

Tapping existing savings and assets you've built up often makes more financial sense than borrowing against your home's value. But sufficient funds are needed for this to be a viable option.

What factors should you consider before opting for equity release?

Before pursuing equity release, you need to evaluate:

• How it would reduce the size of your estate and the inheritance you can leave behind.
• The potential impact on any means-tested benefits you currently claim if funds take you over thresholds.
• Whether releasing equity could push your estate over the inheritance tax threshold on your death.

Also think about how equity release could affect things like:

• Existing mortgages and ownership rights on the property.
• Your ability to purchase property in the future.
• Eligibility for credit and loan applications in retirement.

Ask yourself questions like:

• Do I have a real and immediate need to access this capital now?
• Have I thoroughly explored all the alternative ways to release money from my home?
• Am I comfortable with the long-term consequences for my beneficiaries?

Evaluating equity release options

If equity release still seems the most appropriate route after assessing alternatives, you need to research products across the whole market. Look for competitive interest rates and flexible terms tailored to your situation. Consulting a specialist equity release adviser helps ensure you choose wisely.

Best age for equity release

The ideal age for accessing equity depends on several factors:

• Your life expectancy - the older you are, the more cash you can usually borrow.
• Any existing health issues or potential care needs - if you may need care soon, lifetime mortgages are unlikely to be suitable.
• Whether you want an accessible lump sum or income - income may suit younger applicants.

It's essential to take regulated financial advice on what type of plan at what age would be most appropriate for your unique circumstances.

How to find reputable companies

Look for:

• FCA authorised advisers specialising in equity release and later life lending.
• Firms with access to a wide range of products to best match your needs.
• Strong customer service standards and reviews.
• Advisers who are members of the Equity Release Council.

Choosing the best equity release deals

Consider factors like:

• Interest rates - compare deals to find the most competitive rates.
• Loan-to-value ratios - how much you can borrow relative to property value.
• Early repayment charges – be cautious with deals that have excessive charges if you may want to repay the loan.
• Drawdown options - whether you can take cash in stages after the initial advance.

Using equity release for specific purposes

Equity release may help specifically with:

• Paying care home fees.
• Funding home improvements like adapting bathrooms for accessibility.

Always seek specialist advice, as alternatives could be preferable depending on your situation.

Managing equity release

It's important to understand:

• Any charges or early repayment charges if looking to repay the loan during a set period.
• The impact on owning other properties and future purchases.
• How interest rolling up may affect potential inheritance tax liability.
• How this may affect your entitlement to benefits if you receive any.

Equity release won't show up on your credit file. But lenders may factor it into affordability assessments when you apply for credit. Engaging an equity release solicitor helps ensure you fully understand the legal terms.

What are the pitfalls of equity release?

Pros:

• Tax-free cash lump sum to use as you wish.
• No need to move from your current home.
• No ongoing repayments to make each month.

Cons:

• Reduced inheritance for your beneficiaries.
• Risk of the home falling into negative equity.
• Debt escalates as interest rolls up over time.

Weigh up the equity release pros and cons based on your personal situation. What suits one person may not be appropriate for another. Be sure to consider the disadvantages of equity release.

How do you protect yourself from equity release scams?

• Look to use a regulated UK-based provider authorised by the FCA.
• Don't be rushed or pressured into making a quick decision.
• Read all paperwork carefully and consult a solicitor before signing anything.
• Check the provider is a member of the Equity Release Council.
• Discuss plans with family and friends before going ahead.
• Take financial and legal advice from qualified professionals.
• Include or be open about your plans to any heirs in your decision making process.

What should be your next move?

Equity release allows you to access your property wealth, but it isn't suitable for everyone. Fully consider alternatives like downsizing, remortgaging, home equity loans and using existing assets where appropriate.

If equity release does look like the best approach after researching options, get regulated financial advice and legal guidance and shop around for competitive deals that meet your needs.

With thorough research and support from professionals, equity release can offer useful flexibility in retirement. But all choices come with trade-offs that must align with your personal circumstances. Don't rush in without putting in enough thinking time.