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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely 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
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.
Monthly payments
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.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.
-
The top stocks in the FTSE 100
After a year of strong returns for the UK’s flagship index, which FTSE 100 stocks have posted the best performance in 2024?
By Dan McEvoy Published
-
A junior ISA could turn your child’s pocket money into thousands of pounds
Persuading your child to put their pocket money in a junior ISA might be difficult, but the pennies could quickly grow into pounds – and teach them a valuable lesson about money
By Katie Williams Published
-
Parents face £1,000 'nanny tax' – how to afford it
Hiring a nanny is about to become even more of an expensive hassle for families, especially those in London. Here's how to cut costs
By Ruth Jackson-Kirby Published
-
Is it cheaper to be a sole trader?
It might be cheaper to be a sole trader due to changes to the tax system
By David Prosser Published
-
The best fintech apps on the market
From digital banking to investment platforms, here are the top fintech apps on the market right now, according to David C. Stevenson
By David C. Stevenson Published
-
What pension providers don't tell you about your retirement money
Check the small print from your pension provider or risk losing thousands.
By Merryn Somerset Webb Published
-
Britain’s stifling tax burden
Chancellor Jeremy Hunt's Autumn Statement will see the tax burden rise in each of the next 5 years.
By Emily Hohler Published
-
Brace for a year of tax rises
The government is strapped for cash, so prepare for tax rises. But it’s unlikely to be able to squeeze much more out of us.
By Matthew Lynn Published
-
Lock in high yields on savings, before they disappear
As interest rates peak, time to lock in high yields on your savings, while they are still available.
By Ruth Jackson-Kirby Published
-
Are lifestyle funds still fit for purpose?
Lifestyle funds have failed to do what they were supposed to do – shield savers from risk in the run-up to retirement.
By David Prosser Published