Home equity release is a way to unlock money tied up in your home with a loan. When the property is eventually sold, the lender takes back their cut from the sale and the loan is repaid. Home owners may use it to finance a one-off purchase, or use the money to supplement their pension.
It sounds simple enough, but as with all financial decisions, it's not something that should be taken lightly.
Things to consider
Home equity loans are only available to home owners over the age of 55, and the portion you can borrow from your property will depend on your age – typically the older you are, the more lenders will offer. There are also minimum amounts that you can withdraw, and the value of your home must also be taken into consideration.
It's important to bear in mind that this option can be pricey – often the amount you receive in cash can be a lot less than the amount you have to pay back in interest. You might find that downsizing or budgeting could be a better option.
The most common form of home equity release is a lifetime mortgage, which is where you borrow a sum of money from your home's value. The amount you could borrow will depend on your age and the value of your property. Interest will be incurred on the amount you borrow, but you won't usually pay anything back until you sell your home, pass away or go into long-term care.
While interest rates for traditional mortgages can fluctuate in your favour, an equity release doesn't follow the same pattern, meaning that interest rates could end up a lot higher than usual.
Unlike a conventional mortgage where you can chip away at the loan with repayments, home equity release schemes don't usually allow you to pay back part of your debt while you still own the property, meaning that interest is charged on an ever-increasing amount. This naturally means that your debt can stack up very quickly.
The positive here is that the amount you have to repay won't ever exceed the value of your home, as trade bodies are in place to prevent this from happening. Still, a final word of caution – this means you could end up owing the entire equity of your home to someone else.
The other common method of equity release is home reversion. Home reversion involves selling all of or a share of your property to a provider who then gives you either a tax-free lump sum or provides a regular income. You remain a tenant of your home (and often a co-owner) and live rent free.
The amount you will receive with a home reversion plan will depend on your age and situation. Most home reversions will deliver less than 100% of the property value and can be as low as 20%. You retain the right to live in your home until you die, at which point the home reversion company sells your home.
Home owners may use it to finance a one-off purchase, or use the money to supplement their pension