Is it wise to release that equity in hard times?

EQUITY release is in sharp focus again as the cost of living rises. Seventy-six thousand over-55s borrowed a record £4.8 billion via equity release in 2021 and the long surge in house prices makes it superficially attractive.

The average amount withdrawn jumped to £125,000 – against £105,905 in 2020.

But beware … you need to be very clear about what you want out of it, plus fully cognisant as to the negatives.

It is vital to take independent financial advice. Indeed, it is a Financial Conduct Authority requirement, given there are a range of providers and lenders offering products in this area.

Equity release has the capability of being a boon for some but a disaster for others. Financial advice website

Unbiased says: “The obvious advantage of equity release is that it gives you money to spend now, rather than leaving it locked away.”

Which Money cautions: “The TV ads make it seem like a no-brainer – a way of generating tax-free cash to fund anything from a new kitchen to helping your children take their first step on the property ladder.

“However, these loans have long had a dubious reputation, thanks to high interest rates and opaque, inflexible terms and conditions.” There are two main types.

Taking out a lifetime mortgage, the most popular method, provides a lump sum which is eventually repaid from the sale of your home either when you die or move into longterm care. The amount you can borrow is usually between 18 per cent and 50 per cent of the property’s total value – typically the older you are, the more you can release.

With a home reversion scheme, you sell all or part of your property, but with a legal right to continue living in it. The money can be paid to you either as a lump sum or as a regular income.

Unbiased states: “With a lifetime mortgage, you run the risk of owing far more than you borrowed when the time comes for the home to be sold. This is because a lifetime mortgage (like a regular mortgage) charges compound interest. So at around five per cent interest, the amount you owe would double every 15 years.”

Which Money adds: “If you take out an initial lifetime mortgage worth £100,000 at a rate of 4.5 per cent, the debt will be £125,180 after five years and £156,699 after 10 years. After 15 years, you’ll owe £196,156.”

On the positive side, if house price growth remains strong throughout the period of your lifetime mortgage, you could still end up with a substantial amount of equity in your property after your outstanding debt is settled. Though, the opposite scenario is also possible.

Of home reversion, Unbiased goes on: “The main disadvantage is that you will only receive (usually) a maximum of 60 per cent of the market value of your home, and often much less (as little as 30 per cent). The home will also have to be vacated very quickly after your death, often within a month. This can be a large additional stress on your family, having to sort through your things and clear out the property in addition to arranging your funeral.”

For smaller amounts, borrowing via an unsecured personal loan or credit card will be much cheaper.

You should also weigh up whether you’re able to release money by downsizing.

To be eligible for equity release you must be aged 55 or over. Many schemes have a maximum age of 85 or 90. Remember, equity release may be an option to consider but not necessarily the only one – be careful and don’t make hasty decisions.

Trevor Law is managing director of Eastcote Wealth Management, chartered financial planners, based in Solihull.

Email: tlaw@eastcotewealth.co.uk The views expressed in this article should not be construed as financial advice.