How Does Equity Release Work?

By Vicki Coleman

Equity release has become a popular way for over-55s to generate some extra cash, be it to help out loved ones, clear existing bills, or simply ensure a more comfortable, enjoyable lifestyle.

Data shows that record numbers of homeowners are plundering the value of their home and taking out lifetime mortgages. A total of £4.8 billion was extracted from UK homes in 2021, according to the Equity Release Council[1].

The equity release market saw customers withdraw £125,000 on average as a single lump sum or via incremental drawdown.

Industry analysts suggest the cost-of-living crisis has had a fair bit to do with the newfound appeal of equity release. But they also point to the injection of new providers and features which have helped make it a more attractive option for homeowners wanting to bolster their bank balance.

However, before you follow the crowd and take steps towards taking equity release on your home, you need to get to grips with how it works, including the ‘catch’ of lifetime mortgages.

What is equity release?

Equity release is a way for homeowners aged 55 or over whose property is worth at least £70,000 to release some of the tax-free funds from their home.

There's no need to move and there's no need to sell up. And you’ll often be able to tap safely into some of your property wealth without having to worry about making monthly repayments if you don’t want to.

Unlike standard mortgages, where the interest and capital have to be paid off each month, equity release mortgages ‘roll up’ the interest. This means repayments do not need to be made until the property is sold, usually after the owner dies or moves into residential care.

There are two types of equity release: lifetime mortgages and home reversion plans. The key difference is that with a lifetime mortgage you retain ownership of your home. In a home reversion plan, the sale of your home or part of your home to a lender is exchanged for a cash lump sum or a regular income for life.

For these reasons, most people choose a lifetime mortgage.

What’s the ‘catch’?

Ultimately, equity release can allow you to get access to a six-figure sum of money, which you can spend as you like. Sounds like a pretty good deal, right?

However, there are a couple of drawbacks to consider before you set the wheels in motion to take money out of your property. We’re not inclined to suggest there’s a ‘catch’ because, as with any finance option, there are factors you need to weigh up. Equity release is no different.

As with any loan, you’ll need to repay the capital plus any interest that you accrue. The nature of equity release means that interest rates tend to be higher than standard mortgage – this is because it can often be many years before the loan is repaid.

With a lifetime mortgage the interest charged is added up over the term of your loan. This means your debt will increase quite rapidly. Some lifetime mortgages will let you pay off some of the capital alongside the interest to avoid this happening, but you need to be mindful of early repayment charges.

Many providers also now offer a ‘no negative equity guarantee’ which means that even if house prices fall before the end of your agreement, you’ll never owe more than the market value of your home and you’ll never leave your loved ones in debt.

However, you might have to come to terms with the fact that you’re likely to have considerably less to leave as an inheritance to your loved ones.

How does it work in practice?

Often the best way of explaining something is to give a practical example – and that’s definitely the case with equity release, what with all the talk of ‘compound interest’ and ‘early repayment charges’.

So, here we go:

·       Balance owed on a lifetime mortgage where you borrow £50,000 @ 5% interest and are not making any payments.

·       After five years, the total amount owed would be £63,814.

·       After 10 years, the total amount owed would be £81,445.

This is a somewhat simplistic example and for a more detailed view of what your borrowing could look like, you may want to consult a financial advisor. In fact, we’d really recommend it before making any big financial decision.

Sure, they may cost a pretty penny, but their advice could be worth their weight in gold. A financial advisor will also talk you through your alternatives such as downsizing your property and moving to a cheaper location.

What else do you need to know about equity release?

The big thing that needs mentioning is that receiving a lump sum could reduce what you’re entitled to in terms of means-tested benefits like pension credit and council tax support.

Also, there are a number of costs that come with the transaction including valuation fees, arrangement fees, solicitor fees and, if you want to be certain you’re making the right call, a financial advisor’s fees.

On the balance of things, you might decide that these costs are a fair deal for you being able to enjoy financial freedom.

However, one thing that won’t cost you anything is getting an equity release quote from QuoteSearch. Our cutting-edge technology compares prices and cover directly from leading providers. We also have experts just on the other side of the phone to discuss your individual needs.

Get your equity release quote today.

[1] https://www.mpamag.com/uk/mortgage-types/equity-release/erc-equity-release-activity-up-24/391203