Equity release: should you take money out of your home?
Tapping your home for cash via equity release has never been cheaper or easier. But there are pitfalls – so is it right for you?
More than 40,000 people took out equity-release plans last year, cashing in on almost £4bn of value locked up in their homes. The figures, just published by the Equity Release Council, underline the ongoing popularity of equity-release plans with older people looking to supplement their income in retirement, or to find a cash sum for purposes such as paying off debt or a home refurbishment.
Financial advisers have traditionally been sceptical about equity release, pointing out that the plans are often expensive, and that they reduce the size of any inheritance left over for children. But while selling up and downsizing is still likely to be a more economic route to unlocking value from your home, assuming it is practical, fierce competition in the equity-release market is paying off for potential customers.
Most equity-release plans are lifetime mortgages; you get a cash lump sum by taking out a loan against the value of your home. Importantly, this loan does not have to be repaid during your lifetime. Instead, the mortgage, plus interest, is typically repaid from the sale of your home following your death.
Beware compound interest
The problem with this model is that the laws of compound interest mean the debt incurred will roll up quickly. While equity-release providers typically guarantee that the mortgage debt will never rise above the value of your home, the amount to be repaid can balloon, with interest racking up on previous interest charges as well as on the capital borrowed. Once the loan is finally repaid, there may be little left over from the sale proceeds. Still, the good news is that interest rates on equity-release plans have never been lower. The market-leading deals now cost less than 2.5% a year. At that rate, a borrower taking out a £50,000 advance at age 65 would owe £64,184 by age 75 – and £93,352 by age 90. That’s quite a chunk of interest to be repaid, but an interest rate of 3.5% would result in a £119,791 debt for the same 90 year-old’s estate.
Innovation in the equity-release market also offers comfort. Some providers allow you to pay interest charges as they come up each month, which keeps the size of the debt in check. Another option is to draw down money in chunks as you need it, rather than in one upfront sum. This will reduce the interest you owe. Alternatively, consider an equity-release plan that allows early repayment. This might appeal to homeowners who need cash now but expect to receive an inheritance of their own in a few years’ time.
The combination of reduced cost and greater flexibility means that equity release has become a more attractive option for older homeowners caught in the trap of being asset-rich but cash-poor. The plans still have downsides – and you should definitely take independent financial advice from a specialist in equity release before committing – but do not rule them out.