Equity release: what it is, how it works, costs and more

Equity release is growing in popularity as more people seek to release cash from their home. We reveal how equity release works, when it can be useful and what to watch out for.

What is equity release?

Equity release schemes allow borrowers over the age of 55 to tap into some of the equity they have built up in their home, even if you haven’t fully paid off your mortgage.

You don’t necessarily have to release the money as a lump sum as you can also take it in several smaller amounts, through a drawdown facility.

You won’t be able to release the full value of the equity you’ve built up, as equity release providers impose more restrictive loan-to-values (LTV) on the schemes.

According to Key Equity Release, a total of £884 million was released via equity release schemes in the third quarter of 2020, with the average amount released standing at £82,827.

Can equity release work for people with decent pension savings?

How do lifetime mortgages work?

How does home reversion work?

Home reversion works differently as you sell part or all of your home in return for a lump sum or regular payments.

While you can continue living in your house until you die rent-free, you need to insure and maintain the property.

Similar to a lifetime mortgage, you can ring-fence a percentage of your property for inheritance proposes.

If the value of your property changes, this doesn’t affect the percentage you retain (unless you release more money).

When the plan ends, the house is sold, and the proceeds are shared to everyone who owns a proportion of the property.

It’s worth pointing out that home reversion plans are no longer commonly sold on the market. The uptake of this type of plan has been under 1% at least since 2015, according to Key’s Market Monitor.

How much can I borrow through an equity release plan?

What will an equity release plan cost me?

Why is equity release growing in popularity?

Equity release has become more popular over the last few years, with the number of new plans more than doubling from 21,350 in 2015 to 45,598 by 2019, according to the most recent figures from Key’s Market Monitor.

“There are more over-55-year olds in the UK than ever before, but there are also more people entering retirement with lower pensions than expected but with bigger aspirations and more unsecured as well as secured debts,” said Hale.

“Then there is the issue of the ‘squeezed middle’ with people looking to help younger family members onto the property ladder while potentially supporting their older parents.”

Equity release plans have also proven popular with borrowers who are approaching the end of an interest-only mortgage, but who have no real plan in place for how to clear the capital they owe without selling their home.

There are predictions within the industry that this popularity is likely to increase next year, as awareness of equity release improves, coupled with stretched finances post-Covid-19.

To meet the growing demand, the number of equity release products available has risen sharply over the last few years. Back at the start of 2018 there were just 86 plans available, but there are now 525.

Who is equity release suitable for?

Who is equity release not suitable for?

Who are the main players?

‘Super quality of life’

 Eke used equity release with more2life to access £100,000, which she used to help her daughter rent a property and to pay for an extension to her house.

She also used the money to pay for a holiday for her daughter and her three children, for cruises to Thailand, Singapore and to buy a new car.

“The money has enabled me to have a super quality of life and my four girls were absolutely in agreement as they want me to enjoy my retirement,” said Eke.

“Given the past history of house prices and life expectancy, although nobody can predict how long one lives, there still will be money left for my daughters when l pass away.”

She decided to let the interest roll up as she believes the added value to the house via the refurbishment will offset some of the interest being charged.

Before Eke took out equity release, which took three months to sort out, she did six months of research and got in touch with many equity release providers.

“The adviser [from Key] that visited me was so helpful and informative, l really felt she was looking after my interests,” commented Eke.

“They give you all the advice and calculations to see how much interest you will owe annually so you can see for yourself just how much you are going to pay.”

Eke could have opted for a small mortgage but chose not to due to the repayments.

While she is happy with equity release, she felt she didn’t borrow enough money as you ‘try to borrow the least amount’ – so she had to go through the process again.

She recommends that those considering equity release think carefully about how much to borrow, especially if it’s being used for home improvements as the cost was higher than expected.

“Research the various companies as fees and interest charges and penalties all differ, and would make a big difference to compound interest,” commented Eke.

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