Equity release: How to tap into your home for a cash boost

Growing numbers of older homeowners are expected to tap into the value of their home to release cash and boost poor pensions, while others will be forced to do the same to clear their debts.

Debt is a growing concern for older people, with one in ten over the age of 50 paying £85 a week servicing credit cards or loans.

More than one million carry ‘problem debt’ that they struggle to repay, according to research by the International Longevity Centre UK think tank, together with charity Age UK.

Holiday fun: Brian and Janice Gilbert used their house to finance holidays including a visit to Egypt

The solution for many will be a lifetime mortgage – the most popular form of ‘equity release’. It allows over-55s to borrow against their home, paying interest only at the end of the loan when they sell up or die.

The proportion of the property value that can be borrowed is linked to the owner’s age. Not all borrowers are forced into equity release. Some use it as a means of freeing up money to spend while they are still healthy enough to enjoy it.

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Brian Gilbert, 72, and wife Janice, 68, used equity release to fund home improvements and some fabulous holidays – including a trip to Borneo, a cruise around the Indian Ocean and a visit to the Egyptian pyramids. They both still work part time, Brian as a carpentry joiner and Janice as a cleaner at a local dental surgery.

The couple, from Lichfield, Staffordshire, who have two children and three grandchildren, took a £35,000 lifetime mortgage – about 20 per cent of the property value – with Just Retirement.

Brian says: ‘We had a talk as a family and decided what was what. We felt that there was no point leaving the value of the property untouched when we could make use of the money now.’

The couple drip-fed money from the loan as and when it suited them. This is known as drawdown, the most popular type of lifetime mortgage.

‘It means that we only pay interest on the money we have taken out,’ says Brian.

HOW MUCH WILL EQUITY RELEASE COST YOU? 

If a homeowner takes out £50,000 through equity release on a property worth £250,000 at a rate of 6.2 per cent, the interest owed after one year would equal £3,100.

Taking compound interest into account, the interest owed after year two would be 6.2 per cent of £53,100, or £6,392.

After ten years the debt would equal £91,246 and after 20 years, £166,518 – or nearly 67 per cent of the property value.

This leaves £83,482 of the capital untouched, assuming that house prices have stayed flat.

Our calculator, right, illustrates how much different borrowers may be able to draw on their home using equity release.

How to use drawdown to cut the cost of equity release

Under a drawdown plan, borrowers take money in chunks rather than as one initial lump sum. This means that rather than paying interest on the full sum borrowed right from the start, they are only paying interest on the chunks as they arrive.

Someone who takes a lump sum pays interest on the total figure from day one. Interest rolls up much more quickly and the size of the debt can double in a decade.

For both lump sum and drawdown there are no monthly repayments but annual interest typically ranges between five and seven per cent.

When the homeowner – or last surviving spouse – dies or moves into care, the outstanding debt is subtracted from the total value of the property. Anything left over is distributed according to the owners’ wills.

Equity release plans that let you pay off some interest

The drawbacks are that equity release will cut children’s inheritance and that the loan enjoyed now is small compared with the large stake in the property sacrificed further down the line. However, equity release has become more flexible.

For instance, customers can take a lump sum and make monthly interest repayments, protecting the capital.

Georgina Smith, of equity release specialist Stonehaven, says: ‘Most of our customers now choose to pay the interest each month as they are used to making regular monthly payments, as with their previous mortgage.’

Stephen Lowe, of Just Retirement, which provides equity release via advisers and partner companies, says: ‘Annuity rates have fallen to record lows and the amount of retirement income that people thought they were going to get will be significantly less. Customers are saying they are not prepared to live that type of retirement and will draw on other assets.’

The number of people aged 65 and over who are edging closer to retirement, will increase by an extra 2.4million in five years, according to official figures. Life expectancy is also rising, so pensioners will have to fund a much longer retirement.

But as demand grows, so too will ways to release equity. Smith predicts that new products will emerge with some features of a ‘normal’ mortgage, such as variable interest rates and the ability to repay the capital as well as the interest.

‘There is a big leap between mainstream mortgages and equity release and that space in between is where new products will launch,’ she says. ‘Banks are also likely to become more comfortable with offering equity release as a solution.’

Make sure it’s a scheme with these safeguards

Lifetime mortgages and home-reversion plans – where a percentage of the property is sold to a company – are both regulated by the Financial Conduct Authority and companies selling them must meet strict standards.

Customers must take independent financial advice and explore all options, including other sources of funding, entitlement to state benefits and the possibility of downsizing. Any agreement must be independently signed off by a solicitor.

All members of trade body the Equity Release Council – previously known as Safe Home Income Plans, or SHIP – offer a range of safeguards. This includes a ‘no negative equity guarantee’ so the debt owed will never be more than the value of the property.

Although this could happen technically, if interest rolled up for many years and house prices fell, the provider cannot take more than the property from a person’s estate after they die.

Customers retain the right to remain in their own homes for life, can choose their own solicitor to carry out the legal legwork and can switch an equity release loan to a new property if their circumstances change. Go to equityreleasecouncil.com.