We are retired and in our early seventies and the income from our modest pensions isn’t going as far as we had hoped.
We own our home worth about £550,000 mortgage-free and wonder whether equity release could help our finances.
We have always been careful with money and want to fully understand the benefits and risks of equity release before we decide on a lifetime mortgage.
What are they and what protections are in place for borrowers?
*Question written for illustrative purposes
Harnessing value: Equity release allows UK homeowners aged over 55 to access money tied up in their home, with the loan only paid back after they die or enter long-term care
This is Money replies: It’s good to hear that you are doing your research before leaping into a new financial commitment.
Ultimately only you can decide whether equity release is the right path to take in your circumstances, and it’s essential to seek advice.
You are considering a lifetime mortgage, the most common type of equity release.
It is available to UK homeowners aged 55 and over, and allows you to access some of the value accrued in your home through a tax-free cash loan.
This does not need to be repaid until the last homeowner dies or enters long-term care.
Monthly payments are optional, giving customers the choice to either make regular repayments to reduce the interest that is accrued over time, or to let the interest roll up which will increase the amount owed. They retain 100 per cent ownership of the property.
If you do decide to go ahead, the good news is that the protections and safeguards surrounding this form of borrowing have been reinforced in recent years.
For example, plans from members of industry body the Equity Release Council have a no negative equity guarantee. This means the amount a borrower owes will never exceed the total value of their property.
For those taking a lifetime mortgage, there are two main risks. First, that equity release will reduce the inheritance they can leave behind for loved ones, and second, that the money they release could affect their eligibility for some means-tested state benefits, should they need them.
To get a more in-depth perspective on the risks and protections, we asked Sophie Walsh, head of equity release advice at Royal London Equity Release Advisers.
Options: Lifetime mortgage borrowers can choose to make monthly repayments, or to allow the interest to roll up over time
Is equity release risky?
Sophie Walsh of Royal London Equity Release Advisers says: Equity release can help UK homeowners access some of the value tied up in their property, but it’s important to understand the potential risks.
These can include reducing the value of your estate, so you leave less behind for your family, and potentially affecting entitlement to means-tested state benefits. The loan is also secured against your home.
However, homeowners can manage these risks by seeking guidance from a qualified equity release adviser and choosing plans that meet Equity Release Council standards.
The industry body has set six standards for lifetime mortgages which come under its umbrella.
These include having your interest rate fixed for life, having the right to move home subject to lender approval, having a ‘no negative equity guarantee’ and being able to make voluntary, penalty-free repayments up to an agreed limit, subject to lending criteria.
Given the complexities of equity release, obtaining expert advice and discussing your plans with family members are essential steps to making a fully-informed decision.
It can also be beneficial to use a whole-of-market equity release service. These advisers have access to the widest range of equity release products, so they can match you with the most appropriate plan for your current needs and circumstances.
How have things improved since equity release began?
Homeowners today benefit from far greater flexibility and control than ever before.
Modern lifetime mortgages can include features such as voluntary repayments to reduce interest, and inheritance protection to safeguard a portion of the estate for family.
These products are designed with transparency and clarity in mind, supported by safeguards that promote responsible lending and ensure customers fully understand the implications.
Flexible features: Modern equity release plans may include features such as voluntary repayments and inheritance protection
What is the role of Equity Release Council safeguards?
The Equity Release Council sets standards to protect consumers considering Equity Release.
Council-backed plans include safeguards such as the ability to remain in your home for life, and a no negative equity guarantee. This means you will not owe more than the value of your property, no matter how long the plan is active.
Taking independent legal advice is also a requirement of signing up to a lifetime mortgage, which helps homeowners make informed decisions.
Though equity release may not be suitable for everyone, when used correctly it can be a valuable financial tool.
As well as using it to supplement their retirement income, as you plan to do, other popular reasons to release equity include renovating a home for later life, paying off an existing mortgage, going on holiday and gifting money to friends and family, according to Royal London Equity Release Advisers.
It remains essential to seek professional advice and carefully consider the terms before making any decisions.
Royal London Equity Release Advisers’ calculator can give you an indication of how much you may be able to borrow.
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