‘Can equity release help?’
QMy bills are shooting up but my pension isn’t and I’m worried that I’ll have to dip into my savings. Should I take out equity release to help make ends meet?
Annette Jones, Glos
Faith says: When money is tight but your home is worth a lot, equity release can seem very tempting. Equity release offers property owners over the age of 55 the chance to unlock some of the value of their home, without having to move, and typically without having to make any monthly payments. Instead, interest gets added to your loan and is only repaid when the property is sold or you go into long-term care.
However, equity release can end up costing far more than the amount you originally borrowed, as all that unpaid interest mounts up. It can eat up the value of your home, leaving little afterwards for your partner, for care costs, or for your children to inherit.
Releasing a chunk of money can also affect your entitlement to means-tested benefits such as Pension Credit. If you want to move house in future, you will need to check if your equity release provider is willing to move your loan to the new place. If not, you’ll have to clear the whole debt and any penalties, limiting what else you can afford.
So review alternatives to equity release first. If bills are a problem, weigh up using some of your savings, see if your family would prefer to help, and check if you qualify for grants or benefits at sites such as Turn2Us.org.uk. Releasing money by moving to a smaller house with lower costs can be cheaper and less complicated.
If you do go for equity release, you will have to take financial advice, and should discuss it with your family. If you need to top up your income, consider a drawdown lifetime mortgage rather than releasing a large lump sum. With drawdown, you agree a total amount you can borrow, but only take out smaller sums when needed. That way, you only get charged interest on the money withdrawn.
The good news is that equity release plans have become less expensive and more flexible in recent years. Best buy rates are currently 3.1%, fixed for the life of your loan.
Will Hale, from Key Later Life Finance, says: “You can now make regular payments to manage the impact of compound interest or decide on ad hoc capital repayments up to around 10% of the loan each year without any penalty.”