Equity releases: are they worth it?

Equity releases can get you a tax-free lump sum, but there are a few things to think about before applying.

Our mortgage partner doesn't offer equity release products - this guide is just for information.

Regulations require that providers of equity release products offer advice before arranging. You can also seek independent financial advice.

What is an equity release?

Equity releases – also known as lifetime mortgages - are a way to get a tax-free lump sum of money from your property.

If you’re 55 years or older, you can choose to do this and get the money in one large payment or regular, smaller payments.

If you want money for health care, home improvements, or to support your family, an equity release could be for you.

But as you’d be accessing money that’s tied up with your home, it could affect any inheritance you plan to leave to your family and your estate’s value.

It’s not a quick decision to make, but we’re here to help breakdown how equity releases work and help you decide if this is for you.

We don't compare this type of mortgage - this guide is for informational purposes only. But you can compare remortgages.

Types of equity releases

Equity releases come in two forms, a lifetime mortgage and a home reversion.

Lifetime mortgages

A lifetime mortgage means you’d take out a mortgage on your main home.

You keep full ownership of your property, but the money you get is borrowed from a proportion of your home’s value.

Lifetime mortgages are the most common type of equity release. You can get the money either as one lump sum or smaller sums, as and when you need it.

To apply for a lifetime mortgages your home has to be worth at least £70,000 and you’ll need to have paid off most, if not all, of your mortgage.

There’s also a minimum loan amount, ranging from £10,000 to £45,000 depending on the lender. Generally the older you are, the more you could borrow.

With a lifetime mortgage there’s a fixed interest rate on the loan that builds up each year.

This means the debt is ‘rolled up’. You don’t normally pay any of it back as it gets repaid when you sell your home – either when you go into long-term care or after your death.

There’s a no negative equity guarantee, so if your home drops in value won’t be in a position where you owe more than the house is worth.

Whatever’s left from the sale of your house will go to your family or main benefactor. Bear in mind that it will be a lot less, particularly if you’ve had the lifetime mortgage for a while.

In some cases you can pay some of the interest back early but this depends on the lender.

There tends to be expensive repayment charges for doing this so check the details on the lifetime mortgage you’re thinking of getting closely.

Home reversion

Home reversion is when you sell a part, or all of your home for a lump sum or regular income payments.

For home reversions your age and health determine the amount you can get. You’ll find that a provider might pay you between 20% - 60% of the full market value.

This is because the provider can’t get the money until the house is sold, which can only be done if you go into permanent care or after you die.

Companies also don’t know how much they’ll get back. This makes it a higher risk, which is another reason why they buy a portion of your home for far less than its current market value.

A large part of the sale tends to go to the lender. So there won’t be much to leave as a legacy if you decide this is right for you.

How does an equity release work?

You have to first get advice from a financial advisor. They’ll be able to lay out the benefits and risks for your personal situation.

If you’ve any family members this might impact, then speak to them too so there aren’t any shocks further down the line.

Likewise speaking to anyone you trust who knows you well is a good option.

If this is what you want to do, then you can apply for an equity release and see what options you get back from a lender.

You’ll then go through these terms with a solicitor in great detail before signing or agreeing to anything.

If you want to ensure there’s a set amount left to leave to your family or benefactor, the solicitor can factor this into the contract.

Are there any costs to setting up an equity release?

Yes, like with a standard mortgage, there are expenses to factor in when getting an equity release:

• Maintenance costs on your property

• Arrangement fee for the product you pick

• Legal fees to cover the cost of your solicitor

• Valuation fees

Pros and cons of equity releases

Pros

• Tax free lump of money to spend however you want

• You still own can live in your home

• No negative equity guarantees

• Option to ringfence some of your home value to leave as inheritance

Cons

• It considerably reduces how much you’ll get from your home as it’ll be sold far below market value

• Less money for your benefactors and won’t include your home

• If you have benefits or financial support, it could affect the amount you get

• Once you’ve got one, it could be expensive to switch. Some lenders charging high penalties if you repay early penalties of 25% if you repay early

• Usually comes with inflexible terms

What alternatives are there to an equity release?

An equity release isn’t the only way for you get a lump sum of money. And what’s key is that you take the time to weigh up your options before making any decision.

Here are some other options that exist that you might want to consider:

• Downsizing your home

• Retirement mortgages

• Re-mortgaging

• Adjusting your budget

• Borrowing from a credit card or a personal loan

• Renting out a room in your home

For more information on equity releases, call the Money Advice Service's free and impartial service on 0800 027 4538 or speak to them online.