Equity release as pension plan

The idea of using your house as a cash machine with which to fund your retirement has gone mainstream, with the announcement that Nationwide is the first major mortgage lender to offer it.

The building society's new lifetime mortgage allows homeowners aged between 55 and 85 to take out an interest-only loan against their house. You don't make any monthly repayments; instead, the loan is repaid in full when you die and the house is sold, or you sell your house to move into care.

Equity-release products such as this capitalise on the fact that many older people have a lot of money tied up in their house, but don't want to downsize. Over-55s hold as much as £1.8trn-worth of property around the UK, reckons Nationwide. Prior to the building society's entrance to the market, equity-release products were mainly sold by insurers and smaller specialist providers.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

But while a lifetime mortgage may sound like a great option for people who are not ready to move out of their family home, it's important to be aware that this kind of borrowing is expensive. That's because although you make no repayments on the loan, interest is added to your debt every month, so the compound interest could leave a large debt to be repaid out of your estate when you die.

The interest rates on equity-release products can be high, "meaning the final amount owing can be huge in some cases, large enough to wipe out any remaining equity in the home," warns Stefanie Garber of Which. Yet despite the fact that equity-release products could mean you give away your house for far less than its market value for instance, borrowing 50% loan-to-value (LTV) but losing the rest in interest charges they continue to gain in popularity.

Nationwide's product will allow you to borrow up to £460,000, but not more than 55% of the value of your house. The interest charged ranges from 3.8% to 4.8%, depending on your LTV. Although you can repay up to 10% of the loan every year, early repayment fees do apply. (Although you may be able to avoid this by downsizing, as it is possible to transfer your mortgage if you move.) If this is something you're considering, make sure to read all the small print attached.

If you’d like to find out how much equity you could release from your home, or to find out more about equity release in general, visit our partners, UK Experts Online, for a free report.