What is an equity release mortgage, and should you consider taking one out? If you are nearing retirement and are worried about living expenses, or you have a big home improvement project in mind, releasing equity could be the solution. Besides, equity release can allow you to help your children or grandchildren onto the property ladder by raising the much-needed cash for a deposit.
As with all other mortgage products, finding the best mortgage deal is very important, and will require some know-how (and independent financial advice). Read our guide to get your started and use the online mortgage comparison tool developed by mortgage experts Habito below.
Find more advice on related topics in our mortgages pages.
What is an equity release mortgage?
An equity release mortgage is actually a form of remortgaging, where you take out another loan against the proportion of the property you already own outright. You don't need to have repaid all of your existing mortgage to take out an equity release mortgage. For example, if you own £200,000 of a £300,000 property, you can 'release', or sell back to the bank, a percentage of the £200,000 in exchange for cash.
What types of equity release mortgage are there?
Equity release mortgage types differ according to how you would like to receive the money, how and when the loan will be repaid, and how much you'd like to protect your assets for the beneficiaries in your will.
The vast majority of equity release mortgages fall into the lifetime mortgage category: these essentially are loans secured against the value of a proportion of your home, to be repaid after your death and after the sale of the property. These products are only available to people over the age of 55.
A typical lifetime mortgage allows you instant access to a lump sum equivalent to the equity you're releasing. The catch is the interest, which is applied to the whole amount, and is typically five per cent or more. There are no monthly repayments for this type of mortgage, and you can use all of the money at once if you need to. The whole of the loan becomes repayable upon the sale of the property.
Drawdown lifetime mortgages allow you to draw out some of the money as and when you need it, rather than in one lump sum. These plans can lower the interest to be repaid, because the interest is only applied to the amount you've withdrawn, not all of the equity you're choosing to release.
There is a further way to try and mitigate the potentially high costs of a lifetime mortgage, with an interest-only equity release plan. You will be making monthly repayments, but only the interest amount. These can be fixed or variable rate, and are best suited to people still in work, or able to draw on savings to make the repayments.
There is also sometimes the option of applying for a flexible interest-only equity release plan, which allows you to stop making the interest repayments if you're no longer able to, or don't want to. The provider may charge you to make this switch.
There is also the home reversion plan option, but these are now rare, as they do offer very poor value for money. As part of a home reversion plan, the provider would give you a lump sum in exchange for a percentage of your equity at below market value (as low as half the market price, for instance). When your home is sold after your death, the provider would get the full market value of that equity share. So, while it's cash in hand, a home reversion plan could strip your beneficiaries of a significant portion of their assets. You normally need to be over 65 to qualify for this type of product.
How much equity can I release?
Usually, you're able to release between 18 and 50 per cent of the equity you own. When looking for an equity release provider, you should always check whether they're a member of the Equity Release Council, who operate a no-negative-equity policy. This means that your provider would not allow you to borrow to the extent that the final repayment amount would exceed the value of your home.
You can also set a limit to how much equity can be released yourself, by ringfencing a portion of the equity; this is usually done to ensure that your beneficiaries will receive their inheritance. This does mean, obviously, that the total amount you can borrow will be reduced.
What are pros of equity release mortgages?
Equity release mortgages allow you to gain access to extra cash without having to move home. You retain 100 per cent of home ownership even after you take out the loan. Equity release can be a solution to a 'cash poor, asset rich' situation, improving your quality of life in retirement, and these loans can allow parents to help children onto the property ladder by sourcing cash for a deposit.
What are the cons of equity release?
This remortgaging option can be (very) expensive because of the accumulating interest. It can eat into your beneficiaries' inheritance, or even swallow it up entirely. Some lenders will penalise you if you decide to repay your loan early, while others might not lend at all if you're planning on using the cash for investment or savings. An equity release will also affect your eligibility for benefits.
What happens to equity release loans after death?
The equity release loan will roll on to the next home owner in line, usually your partner or spouse. It's very important to make sure they're on the deeds, or they could be forced to sell up. Then, the loan keeps on getting passed on to anyone who inherits the property, until the last home owner either dies or goes into long-term care. At this point, the property is sold, and the proceeds are used to repay the loan and the lender.
What are the alternatives to equity release?
The best alternative to equity release is downsizing. The benefit of downsizing is that, with the cash left over from the sale of your old place, there'll be no interest to repay in the future. Downsizing can also be a good option when maintaining a larger property becomes difficult, which may affect its value when sold. However, only you know whether you are willing to move home, and whether the trade off is worth it.
Looking to see what type of mortgage is best for you, or trying to work out how much your equity release would allow your children/grandchildren to borrow? Use the Habito comparison tool below to make the number crunching much easier. Then, call them free for a no obligation chat. They can use their know how to advise you on the next stages, help you assess affordability and give you impartial advice to ensure you get the best deal for you.