6 options to consider before choosing an equity release scheme
Equity release schemes allow you to access part of the wealth you have tied up in your home. However, these schemes may not always be the best option and it may be worth considering some of the alternatives.
Equity release schemes allow individuals who are over the age of 55 and own their own home to access the equity in their property to fund large one-off expenses or supplement their retirement income. However, they are complex financial products and may not be suitable for everyone. It’s a legal requirement for homeowners to receive advice from a specialist equity release adviser and legal advice from a solicitor before taking out an equity release scheme. Here we explore some alternatives.
Switch to a new mortgage
If you haven’t paid off your mortgage you could consider remortgaging to release equity. This option will allow you to release a sum that you can use for any purpose you wish.
By remortgaging to a new deal you can unlock some of the equity that has built up in your home. Say you have a home worth £300,000 but only have an outstanding mortgage of £50,000. If you request £100,000 from your new lender you’ll have the required £50,000 to repay your current mortgage and a further £50,000 to spend as you choose.
However, this may not be as simple as it sounds in reality. Borrowing becomes more difficult the older you become and many lenders have strict rules about the maximum age you can be at the end of the mortgage term, and also how you will support the repayments.
» COMPARE: Remortgage rates and deals
Specialised mortgages for pensioners
Usually arranged on an interest-only basis, retirement interest-only mortgages are loans secured against a property and begin during the borrower’s retirement. The term could be for the life of the homeowner or a set period, such as 10 or 15 years. With this type of product, you repay the interest each month but the capital does not have to be repaid until you die or go into long-term care. Lenders will take account of your income, as you’ll need to be able to meet the monthly repayments.
The main advantage compared with a lifetime mortgage is that there will be a smaller amount to repay at the end because you’ll have been making interest payments every month, rather than the interest being rolled up and paid at the end of the mortgage.
Borrow against your property
Secured loans are secured against an asset such as a house. In other words, the lender has the security of knowing that if you’re unable to repay the loan, they’ll be able to take control of your property, sell it and use the proceeds to get their money back. As a result, secured loans normally have a lower interest rate, or borrowing cost, than unsecured loans. But they’re risky for the borrower because you could lose your home if you run into financial difficulty.
The main advantage of a secured loan compared to an equity release product is that it’s a relatively simple product that you can fully repay over a shorter term (five or 10 years). Although the interest rates are likely to be much higher the interest won’t roll up and potentially spiral out of control. Secured loans will have age and affordability restrictions similar to regular mortgage providers.
» COMPARE: Secured loan rates and deals
Unsecured loans are even simpler than secured loans. You borrow money and agree to make regular payments until the loan is repaid in full. But because the loan isn’t secured on your home or another asset, you may face a higher borrowing cost than with a secured loan. Your home is not at risk but, the lender can go to court to try to get their money back.
You could also raise funds via peer-to-peer lending, whereby individuals obtain loans directly from other individuals. You may be able to borrow money more cheaply than from a financial institution.
This is also true of credit unions: self-help cooperatives whose members pool their savings to provide each other with credit at relatively low interest rates.
These options will require you to have a dependable income and affordability to support the repayments.
» COMPARE: Unsecured loan rates and deals
Get a home improvement loan
If you are considering equity release to make house renovations, you could consider a home improvement loan. This could also help increase the value of your property.
There are also a number of government grants and schemes that can help with home improvements. These tend to be available through local authorities and are generally only available to homeowners or private tenants on low incomes. Grants are available to upgrade the heating, insulation and energy efficiency of homes. Contact your local authority to find out if help is available in your area.
Move to a cheaper property
The most straightforward way to access the equity in your property is to sell your current home and move to a cheaper property.
This can free up tax-free cash that you can use to pay for anything you wish. The major advantage is that you keep your capital intact and don’t incur the debt or costs associated with equity release schemes.
However, there are downsides:
- It could take time to sell your home, so it could take longer to access the cash than if you opted for equity release.
- You could struggle to release the amount of equity you need or find a cheaper home that still meets all your needs.
- You may have to pay stamp duty on your new home and you’ll incur other costs, such as estate agent fees, a valuation fee and legal costs.
- You may be leaving a much-loved house that has been your home for many years.
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Anthony is a BBC-trained journalist. He has worked in financial services and specialised in investments for over 20 years, writing for various wealth managers and leading news titles. Read more