Equity release & its alternatives explained

In this article, we explain what equity release is as well as a number of alternatives to choosing an equity release plan. The alternatives listed include ways to raise a lump sum to fund a one-off expense as well as ways to generate additional income to supplement your existing earnings. We also explain how to get equity release advice* which is necessary if you still wish to explore an equity release plan.

What is equity release?

Equity release is a term used to describe ways to release the equity tied up in your home using specific mortgage products. You may have money that is tied up in your home in the form of equity that you wish to access, without the need to sell your house. The equity is the value of your home after you deduct any mortgage loan that is secured against it - essentially, the part that you own. You may own all of the equity in your home if you own it outright and have no mortgage loan.

There are a number of reasons why you could be looking at equity release - you may wish to raise money to:

• Fund your retirement
• Supplement your income
• Pay for a holiday
• Pay medical or care costs
• Consolidate your debts
• Make home improvements
• Help a family member onto the property ladder
• Pay for a wedding

Types of equity release

The two most common equity release schemes are Lifetime mortgages and Home reversion plans.

Lifetime mortgages provide you with a loan that does not have to be repaid whilst you are alive and living in your home. Once you die or go into long-term care, it will be repaid using the proceeds from the sale of your house. The mortgage loan accrues interest which rolls up until the mortgage is repaid which means that you're essentially paying interest on the interest, compounding its effects.

Home reversion plans on the other hand provide you with a sum of money in exchange for a percentage of equity ownership in your property - the loan is usually less than the corresponding value for the equity required, making this type of arrangement a less sought-after solution.

You can read in detail about equity release in our article "What is equity release and how does it work? – Equity release mortgages explained"

Pros and cons of equity release

Pros

• No monthly repayments are required of either capital or interest during your lifetime
• You retain legal ownership of the property and the right to remain living in it during your lifetime
• Since you own the property you should still benefit from an increase in the property value but see the disadvantage below
• If the property is worth less than the loan (negative equity), at the point of repayment, the Equity Release Council standards state that no more than the sale price of the property can be recouped by the equity release mortgage lender

Cons

• The loan will accrue interest and this compounds over your lifetime
• You won't receive the true value of your property in the case of a home reversion plan
• You may not be able to pass on inheritance to your family after death if all the property proceeds pay the equity release lender
• Early repayment charges may prevent you from repaying the loan early
• The mortgage rate offered on equity release loans is seldom the most competitive you will find

Alternatives to equity release

The alternatives to choosing equity release are many but the viability of each option will depend on whether you plan to use the money you raise to supplement your income or fund something with a lump sum. Some equity release alternatives will only suit you if your need is to supplement your income or pay a regular cost while others can be used to raise a lump sum.

Downsizing

Choosing to sell your home to move into a smaller or cheaper property can seem daunting but it may put you in control of your finances. Often people continue to live in houses that exceed their needs due to the convenience and to be near a community they have built up over the years. But even if your home is adequately sized for your needs and you don't feel that you could downsize, you could consider moving into a similar size of property in a cheaper area.

Essentially, selling your home and using some of the funds from the sale towards a less costly property could give you the money that you need as well as put you in control of your financial future. You should, however, weigh up the extra costs involved in moving home including stamp duty, mortgage fees, solicitor's costs, valuation and removal services. Balance these with potentially lower costs of running a smaller home. It is a good idea to look into the property market in your surrounding area and other areas you would consider living in to get an idea of how much money you would be able to release from your home.

Extend mortgage term

This option may suit you if you come to the end of your mortgage term and find yourself with an outstanding mortgage balance to pay off. This is most commonly the case with interest-only mortgages where the repayment plan hasn't reached fruition so there isn't enough money to repay the mortgage as planned.

Extending the term so that you have more time to repay the balance of your mortgage may mean you don't need to release equity from your home to do this. You should check if your lender will allow you to add years to your mortgage and it can be wise to start this conversation before you reach the end of your mortgage term. Lenders work to different age limits and you may need to remortgage to a new lender in order to secure the best mortgage solution. Speak to a qualified mortgage specialist who can access multiple lenders' mortgage deals to get you the best solution to suit your needs. You will find everything you need to know in our article "Can I extend my mortgage term?"

Retirement interest-only mortgage

A retirement interest-only mortgage can provide similar benefits to extending the term of your mortgage but without the limitations of age caps. A retirement interest-only mortgage has the advantage of keeping your monthly payments low while avoiding the accrual of interest which can compound with equity release solutions. You will find a full explanation of this arrangement in our article "What is a retirement interest-only mortgage and should I get one?"

Rent out a room

Renting out a spare room in your house can provide you with a regular income that could be sustained over a long period of time. You have to consider the practicalities and realities of sharing your personal space and set out some rules to ensure that the situation has a good chance of working for you and the person renting your space. There are also considerations around taxation of this type of income and you will find all the information you need in our article "How to rent a room in your house".

Sell assets

The amount of money that you can raise will depend on the amount of sellable assets you have and their value. However, this could be a quick way to raise funds without much effort and may even help you to declutter your home and garage.

Personal loan / Credit card

A personal loan can be a more appropriate solution than equity release if you need to raise a relatively small amount of money over a short period of time. You can arrange these quite quickly and easily with some loan decisions available immediately. You can read more in our article "The best personal loans".

Remortgage to release equity

Instead of arranging an equity release loan you could simply remortgage to a new mortgage as long as you meet the age and affordability criteria. This could put you in control of when the money you borrow is repaid as well as avoiding some of the extra risks involved with equity release. When you come to the end of your mortgage deal period, you can remortgage and incorporate an increase to your mortgage borrowing in order to release some equity. You will reduce the amount of equity you own in your home by doing so and the amount you can borrow will depend on your current loan-to-value (LTV). You should consider the impact a higher LTV will have on the interest rate you can secure from your mortgage lender. Your monthly mortgage payments will likely increase in line with the extra borrowing. In order to understand how remortgaging to release equity works, read our article "Remortgage to release equity from your home".

Budgeting

Raising money using an equity release plan does offer you the option to arrange a loan that you then draw down as and when needed so that you're only paying interest on what you draw down. If you are creating this fund with a view to supplementing your income, it can be a very expensive way of doing so. It is wise to ensure that you've exhausted other means of managing your expenditure such as budgeting. Budgeting could reveal ways to reduce your outgoings or just make your money go further without the need to draw down. There are a number of budgeting apps to choose from that can make the process very simple and manageable on an ongoing basis. Our article "The best budgeting apps in the UK: How to budget without trying" explains everything you need to know to get started and you can also access the Money to the Masses budget planner template along with a short video from Damien explaining how to use it.

Other alternatives to equity release

Equity release options often target an older borrower audience and you could easily think that it is the best option before exploring the alternatives. As well as the alternative solutions we have explained in this article, you can also investigate whether you qualify for local authority grants or loans to achieve your goals. Generating another income with additional or casual work or by changing jobs to be paid more could provide a more wholesome solution to your financial needs.

How to decide if equity release is right for you

Equity release is offered by qualified mortgage specialists, however, there is a specific qualification that ensures mortgage brokers are equipped to provide you with the best advice for your circumstances when it comes to equity release. This in itself indicates how carefully the equity release decision should be made. If you have considered all the alternatives and wish to explore equity release, you will need to speak to a qualified equity release specialist. They will discuss the different options available to you and explain the risks so that you can make an informed decision. VouchedFor* is a website that lets you find and compare local financial advisers, mortgage brokers, solicitors and accountants. Helpfully, you can filter results for your specific needs, with equity release being one of the options available via the directory. The advisers are extremely knowledgeable and the site allows you to see the reviews submitted by real customers.

 

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