Martin Lewis: Is equity release the best option?

Cash poor, but older person living in your own home – the simple solution is to do an equity release – or at least that’s what the adverts say. Yet is it the solution it’s cracked up to be? We ask our Money Saving Expert Martin Lewis…

If you own a home but need cash is this the best way to do it?

Equity release is a way of spending your home’s value whilst you’re still living there. It’s done via a loan, which is usually repaid from your home’s value once you die.

Before that though I’d always first look at whether you can downsize. If you can sell your home, move into a smaller one, and live off that money, great – you may also find somewhere that’s more suitable as you get old.

If you can do this, it’s likely better to do it sooner (though of course if house prices accelerated rapidly there is a chance waiting wins). That’s because I often here many in their sixties say “it’s still a few years away” and then it gets to a point when “we’re too old to leave”. So don’t put it off, if you can do it, do it while you’re still enthusiastic enough.

How does equity release work?

It’s usually a bit like a mortgage you get on your house that isn’t paid off until you die – so if you’ve no one to leave the money to – it’s a decent, though expensive, way to raise cash. If you do have people you want to leave your assets to, then doing equity release means there will be less to leave after you’ve gone. Then again, it is your money, so prioritise your own standard of living first.

Like mortgages, there are lots of different types, but they fall into two main camps.

1) Lifetime mortgage: This is the most popular. You need to be 55 or over to get it and you can borrow a percentage of your home’s value, at a fixed or variable (but then must be capped) interest rate. How much you can borrow depends on how old you are – the older you are the more you can borrow. Unlike a mortgage though, with equity release you haven’t traditionally made repayments to reduce the debt, so interest compounds – though some newer ‘drawdown’ versions do allow you to do this to reduce the debt.

2) Home reversion plan: You need to be at least 60 to get this, and here the equity release provider will buy a portion of your house (below the market value), and in exchange they give you a tax-free lump sum. You’ll still be able to live in your house rent-free until you die. When you die, the proceeds of the house sale is split between the percentage you own and the lender owns – so if your house value has gone up significantly so does the amount they get.

How much does it cost to get?

For the lifetime mortgage equity release, the typical rate is 5.14% that’s slightly higher than ordinary standard variable rate mortgages – yet far more expensive than the cheapest new mortgage deals on the market.

However the real reason they are costly is that you’re not (usually) making monthly repayments to reduce the debt, so the interest compounds and compounds. For example borrow £20,000 aged 60 at 5.14% on a £120,000 home and the amount you owe doubles every 15 years. So live until 75 and you owe £40,000, live until 90 and you owe £80,000.

There are some newer versions of equity release now that allow you, in various ways to make interest repayments as you go, or one off payments to reduce what you borrow, which can improve this.

If equity release is right for me, what’s the best way to do it?

Okay, here’s a few other key points…

1. Don’t borrow the full amount you need in one go

The sooner you borrow the more expensive it is, as it has longer to grow. So borrow as little as you need now, and wait as long as you can to do it.

For example, if you think you may need £40,000 from your house to cover 10 years, it’s best not to take it all now, but to take only what you need now, and wait to take any more until needed. The newer ‘drawdown lifetime mortgages’ are set up to make this easier. It'll usually work out much cheaper, plus you may need more cash later for long term care.

2. Ensure you get it from a company that’s a member of the Equity Release Council

This trade body's members all promise your estate will never owe more than your home is worth, a "no negative equity" guarantee.

3. Get advice before you do it

If you're seriously considering this, speak to an independent mortgage broker or financial adviser with an equity release qualification to find the best deal. You can find one at unbiased.co.uk, Vouched For, or the Equity Release Council’s member directory.

4. It can affect your benefits

Having cash rather than a property can affect the benefits you’re entitled to, for example pension credit, universal credit and other things. So think carefully first and your independent financial advisor should be able to talk you through your options.