Don’t rush into equity release

Hand squeezing a house with money coming out © Alamy

It’s becoming increasingly popular to release cash from your home, but it’s still a risky move.

Almost 40,000 households used equity-release products in the first half of 2018, according to figures from the Equity Release Council (ERC), an industry body. This included 21,490 new plans, an increase of 28% from 16,805 in the same period last year.

This growth has apparently been driven by product innovation and increased flexibility, reckons the ERC, with the number of equity-release products on the market more than doubling in the past two years. (Presumably the increase in how much people’s houses are worth has fuelled uptake too.) Yet despite its apparent popularity, using your home as a cash machine to fund your retirement or help your kids buy a house can be a risky move.

Equity release allows homeowners to access capital held in their homes, normally through products like a lifetime mortgage or home-reversion scheme. A lifetime mortgage involves borrowing money secured against your home, while retaining ownership. You pay interest on the amount borrowed – generally this is added on to the total, pushing up the amount you owe, though some plans let you repay as you go.

When you die or move into long-term care, the home is sold, and the money from the sale used to pay off the loan. With a home-reversion scheme, you sell all or part of your home in return for a cash lump sum, a regular income, or both. You can then live in the home until you die.

While the majority of equity-release providers are insurers or specialist companies, there are a couple of household names dipping their toes into the market, too. Building society Nationwide became the first high street name to enter the market at the end of 2017, while insurer Saga has recently launched a product which allows customers to take monthly tax-free payments from their property.

Saga’s regular-drawdown lifetime mortgage is available to people aged 60 to 80, in contrast to the majority of products that offer lump-sum payments. Borrowers must take an initial sum of £10,000, to be followed by at least £200 a month for a minimum of five years. Customers can review their plan each year and change the value of monthly payments or release further lump sums.

Interest rates are still very high

The ERC is quick to point out that equity-release rates are coming down. The average interest rate for products was 5.22% in July 2018, down from 5.27% in July 2017, and from 5.96% a year earlier. But despite this, it’s important to be aware that these rates are still very high compared to both traditional mortgages, and also the Bank of England base rate (the rate at which it charges lenders when they borrow money). Along with high interest rates, some products have high arrangement or exit fees, and generally offer a bad deal.

A lifetime mortgage can end up costing more than three times what you borrow after 20 years, according to calculations from consumer group Which? In the worst-case scenario, you could even end up owing more than the value of your house, though reputable providers have a “no negative equity” guarantee. Home reversion schemes can also be terrible value, with some demanding more than 70% of your home’s value for just a 20% advance.

It’s also worth being aware that if you release equity from your home, you may not be able to rely on your property wealth later in life to fund long-term care or pass on an inheritance; it can also have a negative impact on your entitlement to means-tested benefits. If you are considering equity release, make sure you seek independent financial advice. All advisers recommending such schemes must have a specialist qualification.