Many homeowners turn to equity release as they approach or enter retirement.
Even if you feel comfortable with your overall assets, you might find yourself “asset-rich but cash-poor.”
This means that much of your wealth is tied up in your home, leaving you with less readily available money for day-to-day living, unexpected expenses, or those things you’ve always dreamed of doing.
As you consider the possibilities of equity release, it’s important to understand its common uses and what it could mean for your financial future.
Please Note: The content on this page is designed to be a helpful starting point for understanding equity release. It explores the concept, different plan types, and the general process involved. However, equity release is a complex financial decision with significant implications for your long-term financial security. To determine if equity release is the right option for you, it’s essential to consult with a qualified financial adviser who specialises in equity release products.
Understanding Equity Release
Equity release schemes allow homeowners over the age of 55 to access the value tied up in their property without the need to sell or move out.
The money you generate will come from the equity you have built up in your home.
There are two primary types of equity release plans:
Lifetime Mortgages
A lifetime mortgage is a type of equity release where you take out a loan secured against your home.
Interest is charged on the amount you borrow, but you don’t have to make any repayments while you’re alive.
The original loan and the interest are repaid when your home is sold, usually when you pass away or move into long-term care.
Home Reversion Plans
Home reversion involves selling a part or all of your home to a reversion company in exchange for a lump sum or regular payments.
Here, you live in the property rent-free until you die or move out, but you’ll no longer own it fully.
You need to be at least 60 years old and the portion of your property you retain will pass to your estate when the plan ends.
Lump sum or regular payments?
When lifetime mortgages were first introduced, you could only take an initial lump sum. And some providers weren’t able to offer additional money via a further advance.
Fortunately, things have moved on quite a bit.
Your main options will be:
Lump sum
This is the original format, where you choose an initial amount of tax-free cash to release. You get given the money as a single payment and can then work out what to spend it on.
Drawdown facility
A drawdown facility is available from quite a few lifetime mortgage providers. It is a pre-agreed loan facility that is approved when you make your initial application. You obviously don’t have to take all of the money if you don’t need it. Unlike the ‘old’ lump sum option, you also don’t need to take too much in one go, just choose what you need and when.
Regular payments
The ability to take regular equity release payments has grown out of the pre-agreed credit limit used in the drawdown facility. With this option you ask the lender to send you regular payments, this could be monthly or annually, a bit like an income. Except there’s no income tax to pay!
You will find more useful information in our article: Do you have to pay tax on equity release?
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The most common uses for equity release
Equity release can unlock a world of possibilities, allowing you to make the most of your hard-earned home equity.
Here are some of the most common ways people responsibly use these funds:
Home Improvements
Topping the list of popular uses is making improvements to your current house.
Whether it’s that long-awaited kitchen remodel, creating greater accessibility with adaptations, or investing in energy-efficient upgrades, equity release can make it happen.
Debt Consolidation
If you have an existing mortgage, credit card balances, or other loans, equity release can streamline your finances.
Consolidating your debts into a single loan can simplify your debts and reduce the burden of monthly repayments.
Boosting Retirement Income
Enjoy your retirement years with greater financial peace of mind. Equity release funds can provide a much-needed boost to your regular income or create a cash reserve for unexpected expenses.
Lifestyle Enhancements
Retirement should be a time to enjoy the things you may not have had time for before.
Equity release can fund dream holidays, a new car, or support the hobbies and passions that enrich your life.
Property Purchases
Equity release isn’t just about your current home.
It can open the door to a new primary residence (perhaps one that’s better suited to your needs), a holiday home for relaxing getaways, or even a buy-to-let investment.
Healthcare & Care Costs
As we age, health and care needs can change.
Equity release can be a way to fund medical treatment, make your home safer and more accessible through adaptations, or even cover the costs of in-home care should the need arise.
Helping Family
Equity release can be a generous way to support your loved ones financially.
This can be particularly helpful for younger family members facing significant life milestones, such as saving for a house deposit or paying for university fees.
It can alleviate some of the financial burden they might face and give them a head start. However, it’s important to approach such gifting carefully.
Seeking professional financial advice can help you understand the potential implications of equity release on your own long-term financial security.
Ensure that everyone involved understands the terms of the gift and that you’re comfortable with the amount you’re giving.
Other uses
There’s really no limit to how you use the money, but some situations are a little more nuanced and require additional guidance.
Inheritance Tax Planning
With house prices rising, more homeowners are finding themselves potentially liable for Inheritance Tax (IHT) when they pass on their estate.
Equity release can sometimes be a tool to reduce or mitigate IHT.
However, IHT Planning is a complex area, and the implications for your beneficiaries can be significant. It is absolutely essential to consult with a specialist financial adviser alongside your equity release adviser.
If done incorrectly, ‘IHT planning’ could have no effect or possibly make the situation worse.
Early Retirement
If you’re nearing retirement age and face the prospect of job loss or reduced income, equity release might seem like a solution to bridge the gap until you can access your pensions.
While it can be an option to explore, this decision requires extra careful consideration and calculations.
An equity release adviser can help you understand if this is a viable strategy, the long-term costs involved, and any potential impacts on your eligibility for benefits.
What you can’t use equity release for
Equity release lenders have your best interests in mind.
They want to ensure the money is used responsibly and your long-term financial well-being is protected.
Here are some things they won’t agree to:
Investing
The stock market and similar investments can be volatile. Lenders generally won’t allow you to directly invest equity release funds in these areas, as the potential losses could outweigh the loan’s interest.
Gambling
Equity release funds should not be used for gambling or similar activities. These ventures carry a high risk of significant financial loss and could put you in a difficult financial position.
Crypto
Basically gambling! Don’t use your money to buy or ‘invest’ in crypto currency like Bitcoin.
Where to go for advice
Only a suitably qualified adviser is permitted to help you set up or amend an equity release plan.
They will be able to fully explain your options, the costs involved and the advantages and disadvantages.
Once they fully understand your situation they can begin to research your options and select a suitable equity release solution.
Let Respect Mortgages help you.
We can match you to an award winning equity release specialist, with over 25 years experience helping people just like you. Importantly they’re also members of the Equity Release Council.
Please call us on 0330 030 5050 for more details.
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Here are links to further information about some of the topics we have covered:
The Complete Guide to Equity Release
Our guide to unlocking the cash from your home using an equity release plan.
Do you have to pay tax on equity release?
Many borrowers question whether the money raised is taxed. It’s a fair question as the average lump sum taken is around £80,000, according to the Equity Release Council.
What is a gifted deposit?
Over 50% of first time buyers are expected to get help from the Bank of Mum and Dad to buy a property. We explain what gifted deposits are (and are not).
Borrowing into retirement
Applying for a mortgage later in life can be particularly challenging, even if you’ve always been financially savvy. In this guide we will outline the options and solutions available.
Can I give my children money from equity release?
Equity release could give you the resources to provide your children or grandchildren with money from the “Bank of Mum and Dad“.
What is a RIO mortgage?
You’ve probably come across the term ‘RIO mortgage’. But what exactly is a RIO mortgage, and how does it work?
What’s the difference between a remortgage and equity release?
Both are types of mortgage that don’t involve moving home. We explain the main differences that set them apart.
Things to Consider Before Taking Equity Release
Equity release can be a great way to access extra money – but is it right for you?
