If your relative owns their own home, equity release can sound like an attractive way to release capital without the worry of moving. However, it isn't suitable for everyone, so approach it with caution.
What is equity release?
Your relative can use equity release to get a tax-free cash lump sum, or to ‘draw down’ smaller amounts of money as and when they need it. Equity release schemes usually give people the right to continue living in the property until they pass away or move into long-term residential care. The cash sum raised against the value of the house is repaid when the house is sold. If the home is owned by a couple, the money is not usually repayable until the death of the second partner.
There are lots of different equity release schemes, offered by a range of providers, but there are two main types:
A lifetime mortgage: where you are loaned money against the value of the home.
A home reversion plan: where all or part of the property is sold to a home reversion company.
Your relative is loaned a lump sum (or can draw down smaller sums as and when they need) against the value of their home. The older your relative is and the greater the value of the property, the larger the cash sum that can be released. For example, a 65-year-old couple might be able to borrow up to 25% of their home’s value, whereas an 80-year-old couple might be able to borrow up to 40%.
There is no time limit or ‘end date’ to the loan. The total sum is only repayable when the property is sold. Interest is added to the sum monthly or annually, so the total amount owed can go up quite considerably over time. Most schemes don’t let you pay off the interest as you go along – it’s all added to the lump sum at the end.
Which? Money has more advice on lifetime mortgages.
Home reversion plan
Your relative agrees to sell a proportion of their property to a home reversion company. This can give them a lump sum of tax-free cash. Alternatively, they might want to sell a certain percentage now and then ‘draw down’ other amounts later by selling further percentages. The amount owed is not repayable until the property is sold. At that time, the home reversion company would receive a share of the sale proceeds, relating to the proportion that it owns.
Home reversion plans give owners the right to live in their home until they die or move into long-term residential care. It is important, however, to be aware that with home reversion plans (unlike a lifetime mortgage), your relative will lose sole ownership of their home. For example, they might own 50% and the home reversion company might own the other 50%. So, when the property is sold, your relative (or their beneficiaries) will not get all the proceeds from the sale.
You can find more information about home reversions on the Which? Money site.
Who is eligible for equity release?
To be eligible for an equity release scheme your relative needs to:
- live in the UK
- own their home outright
- be over a certain age (most schemes have a lower age limit of 60, some 55).
If you’re in a couple, you’re not eligible until the youngest partner reaches the specified age.
The amount of money that can be released is dependent on age(s), property value and sometimes health. This will vary between lenders and the type of plan chosen.
In addition, the property needs to:
- be in a reasonable state of repair
- if leasehold, it will need at least 75 years of the lease remaining (the loan can be used to extend a lease).
Research published by Which? Money in March 2013 warns that some equity release schemes can be expensive and inflexible. Most interest rates are much higher than standard mortgages, so your relative could easily owe double what they borrowed within 10–12 years. There could also be high penalties to pay if you want to end the scheme early. Only consider equity release if you and your relative:
- have explored all other possible options
- fully understand the potential costs.
It’s vital to take independent financial advice about the suitability of each scheme. Advisers that specialise in this type of advice should hold a CF7 or ER1 qualification. The Society of Later Life Advisers (SOLLA) provides specialist advice to older people looking to fund care. You could also contact Step Change, a charity-operated service offering free advice on equity release.
Maintenance and insurance
Don’t forget that your relative will still be responsible for home repairs and buildings insurance once the scheme is in place.
Remember that equity release is not right for everyone. If your relative is considering equity release, there are a few things that you can do, or ask them to think about, which will help them in their decision-making. See our Checklist for considering equity release for more advice.
- Property downsizing could be an alternative way to raise money for care costs.
- If your relative is struggling to live alone, but still wants to be independent, Sheltered housing could be a viable option.
- To help you decide if equity release is suitable, see our Checklist for considering equity release.
Page last reviewed: 30 November 2015
Next review due: 31 January 2017