Has the cost-of-living crisis tipped the balance in favour of equity release for over-55s?
What is equity release?
Equity release is a way of releasing money tied up in your home that you can use now rather than leaving for others to inherit. There are a couple of types of equity release and by far the most popular is the lifetime mortgage. That’s a long-term loan secured against your home that releases (usually) up to 60% of the value of your property’s value.
Interest is charged on the loan, but you don’t usually pay anything back until you die. The amount you owe is then taken from the proceeds of sale of the home.
What are the pros and cons of equity release?
Advantages of a lifetime mortgage:
- You get to stay in your home until you die or need long term care
- Most equity release providers offer a ‘no negative equity guarantee’ so you can never owe more than your property is worth
- You’ll usually be able to take amounts in small ‘chunks’ rather than as a single large loan
- You’ll still benefit from any increases in the value of your property (meaning the loan will represent a smaller proportion of the total value than it otherwise would)
- You can take a lifetime mortgage out at (almost) any age once you’re over 55
Disadvantages of a lifetime mortgage
- As most people don’t make repayments on the amount they borrow, the debt can grow quickly
- You’ll need to check whether and how receiving a lump sum (or several smaller sums) might affect the benefits your receive or the tax you pay
- There won’t be as much for your family to inherit
- Releasing equity from your home now may affect your ability to move somewhere else or afford the long-term care you need
Is equity release a good idea?
Let’s be completely honest about this: you wouldn’t usually consider equity release unless a) you really needed money now or b) the idea of leaving a larger inheritance didn’t matter to you.
If, for example, your home was worth £250,000 and you didn’t plan to leave it to anyone when you die, why leave the money tied up in bricks and mortar when you could release up to £150,000 to enjoy now?
Recently, however, the cost-of-living crisis has made equity release a serious consideration for many more people, including:
Income boosters: Have you just retired but found the current crisis is placing too great a strain on your finances? Equity release could help you continue to enjoy retirement and not have to worry about returning to work. The ability to draw down lump sums as you need helps too, so you release only the equity you really need (and only pay interest on the amounts you draw).
Home improvers: You’d factored in the cost of home improvements, but then the world went haywire, costs went through the roof and the plans you had now cost twice the amount. Or, perhaps you hadn’t anticipated needing to make any significant alterations but a health issue changed all that. Equity release could help you complete the work without having to worry about repayments.
Mortgage repayers: You’re nearing the end of your mortgage but the recent increase in interest rates has left you worrying that you’ll struggle to finish the job (in which case, you’re not alone, as recent reports show[1]). Or perhaps you are seeing out an interest-only mortgage and rising costs mean you’ll struggle to pay off the outstanding amount as planned. Equity release could come to the rescue here too.
Lifetime mortgages have long been the financial equivalent of the cavalry arriving to help you when the retirement finances don’t quite stack up. It looks as though many more people may need the cavalry before the current crisis is over.
If you’d like to explore your equity release options, talk to us now.
[1] https://www.whatmortgage.co.uk/equity-release-2/news-equity-release-2/cost-of-living-crisis-a-third-of-over-55s-face-mortgage-repayment-struggles/
