Key Points. Disadvantages of equity release include high overall cost, potentially expensive early repayment charges, and losing eligibility for means-tested state benefits. Equity release can severely reduce the value of your home left to beneficiaries and may affect your entitlement to some benefits.
Downsizing. The most obvious alternative to equity release is to downsize – i.e. sell your current home and move into a smaller property (or at least one that is less expensive).
Equity release plans provide you with a cash lump sum or regular income. The "catch" is that the money released will need to be repaid when you pass away or move into long term care. With a Lifetime Mortgage, you will owe the capital borrowed and the loan interest accrued.
Pros: Large lump sum, no monthly repayments, continue living in your home, tax-free cash, and can be used for any purpose. Cons: Can be expensive to repay, affects inheritance, and may impact means-tested benefits. Equity release is not a con when using legal, regulated lenders and seeking independent financial advice.
A home equity loan risks your home and erodes your net worth. Don't take out a home equity loan to consolidate debt without addressing the behavior that created the debt. Don't use home equity to fund a lifestyle your income doesn't support. Don't take out a home equity loan to pay for college or buy a car.
Using a home equity loan for debt consolidation will generally lower your monthly payments since you'll likely have a lower interest rate and a longer loan term. If you have a tight monthly budget, the money you save each month could be exactly what you need to get out of debt.
Pay using borrowed equity
The preferable solution for all scenarios where the borrower has property – funds are released from an existing property as an equity release or top-up. These funds are then used for the deposit to purchase a property, and then remaining purchase funds borrowed against the new property.
Equity release is traditionally aimed at pension-age homeowners. Many equity release lenders insist upon all applicants being aged 60+, but Age Partnership have access to plans for everyone aged 55 and above.
Key statistics for Q4 2021 and FY 2021
For the year as a whole, 76,154 customers took out new equity release plans, made use of drawdown reserves or agreed extensions to existing plans. This was a 4% increase year-on-year from 72,988, although it remains below the peak of 85,497 seen in 2019 [see graph 1].
Lifetime mortgage
This is the most popular type of equity release. You borrow a lump sum in the form of a mortgage, which is eventually repaid from the sale of your home either when you die or move into long-term care.
The average equity release interest rate is currently 6.21%, with typical lifetime mortgage interest rates ranging from between 5.50% to 7%.
You'll normally get between 20% and 60% of the market value of your home (or of the part you sell). When considering a home reversion plan, you should check: Whether or not you can release equity in several payments or in one lump sum. The minimum age at which you can take out a home reversion plan.
The most common form of equity release is a mortgage that isn't paid off until you die. So if you have no one to leave your assets to, it's a decent, though expensive, route to raise cash. If you do have people to pass assets to, equity release generally means there will be less for them to inherit.
Since Debt is almost always cheaper than Equity, Debt is almost always the answer. Debt is cheaper than Equity because interest paid on Debt is tax-deductible, and lenders' expected returns are lower than those of equity investors (shareholders). The risk and potential returns of Debt are both lower.
Equity release works by borrowing cash against the value of your home. There are two ways to do this – a lifetime mortgage and a home reversion plan. Lifetime mortgages allow you to release some of your home value to a limit, while still being the homeowner. This cash is tax-free and able to be used as you please.
Involve family members or a trusted friend
If you don't involve family members then we'd suggest discussing your plans with a trusted friend. It's also good to inform the executors of your estate, as they may have to deal with the equity release provider when the house is sold.
Like all financial products, equity release isn't right for everyone. But for some people, unlocking money tied up in property can make a real difference, whether they're looking to make some home improvements, gift money to family or consolidate debt. Think carefully before securing other debts against your home.
A lifetime mortgage is a type of equity release, a loan secured against your home that allows you to release tax-free cash without needing to move out. Lifetime mortgages are available to homeowners aged 55 or over. You can take the money as a lump sum or as series of lump sums.
It usually takes around eight weeks for an equity release application to complete and for you to receive your funds. Some applications complete in as little as three weeks; however, some complicated cases can take many months.
Equity release lets homeowners aged 55 and over release tax-free cash from the value of their home. The amount you can release is based on your age and how much your home is worth. Depending on the equity release product you choose, you can claim your money as one big lump sum or as a series of smaller lump sums.
At the end of the first month (or year), the interest charged is added to the original loan. This interest is then 'compounded'. This means it's calculated on the sum of the original loan, plus the interest charge in the first month (or year). With each month (or year) that passes, this process continues.
You can take equity release more than once. There may be additional funds from your existing lender, which you can release with a drawdown plan or by a further advance. Alternatively, you can replace your existing equity release plan with a new one that repays your current lender and provides you with additional funds.
Is Debt Financing or Equity Financing Riskier? It depends. Debt financing can be riskier if you are not profitable as there will be loan pressure from your lenders. However, equity financing can be risky if your investors expect you to turn a healthy profit, which they often do.
Equity financing may be less risky than debt financing because you don't have a loan to repay or collateral at stake. Debt also requires regular repayments, which can hurt your company's cash flow and its ability to grow.
Using the equity in your home means the total amount you owe on your home loan will increase, which can result in higher monthly repayments. There may also be restrictions on your home loan that can prevent you from making additional repayments or accessing the equity in your home.