Equity release explained Is equity release right for you?
Get independent financial advice before risking your biggest asset
Before you decide to take out an equity release scheme, consider the alternatives. Equity release schemes are designed to be a lifelong commitment, so if you change your mind, need to move house or want your equity for something else later, you could find yourself seriously restricted.
The table below shows you how your debt could grow over time and therefore how much equity you might be left with.
If you do take one out, you should always see if you can get a better deal once the early repayment charge period has ended.
Alternatives include selling your property to downsize to a cheaper one, borrowing money from relatives, taking out a loan or conventional mortgage (if you can afford the repayments and can find a lender who will lend to retired people) or using other assets such as savings. Your local authority may offer grants or loans for home improvements or other needs, so find out first.
Also, make sure you’re claiming all the state benefits that you’re entitled to. Releasing equity could affect your entitlement to means-tested benefits.
How your equity release debt grows
The graph below shows how a debt of £40,000 would increase with a roll-up lifetime mortgage at the average fixed rate of 6.9% (AER 7.09%), compared with releasing the same amount through a typical home reversion scheme by selling 48% of your home if you were a 70-year-old woman with a £200,000 property. The increase in the value of the property is also shown if it grew at a rate of 1% a year.
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Choosing an equity release scheme
If you decide that an equity release scheme is the right option, it’s essential to speak to an independent financial adviser before choosing one. When we tested equity release advice in April and May 2009, only a third of advisers passed our test, so it’s important to choose carefully. You should look for one with a specialist equity release qualification. You can find one through the Society of Later Life Advisers.
Advisers usually get commission of between 0.25% and 3% of the loan amount for arranging a scheme, but this shouldn’t affect their recommendation to you. It’s likely that you’ll also have to pay between £500 and £1,200 to an adviser for equity release advice, so check this with them before choosing one.
Ship (Safe Home Income Plans) is the trade body for equity release. Members agree to abide by a code of conduct. All member providers’ schemes have a ‘no negative equity’ guarantee, which means you will never owe more than the value of your home. However, some of the least restrictive schemes in our lifetime mortgage table are from non-Ship members, and all except Holmesdale offer a no negative equity guarantee.
Tips for choosing the right equity release scheme
- Speak to an independent financial adviser before deciding whether to take out an equity release scheme and get independent legal advice.
- Explore all other options and find out how equity release would effect your entitlement to state benefits first.
- Borrow the minimum amount you need to or choose a drawdown scheme to give you the option to borrow money as and when you need it.
- Consider taking out a scheme that lets you make interest payments each month if you could afford to.
- Choose a scheme with no early repayment charges or ones that apply only for a limited period.
- If you're unsure about whether equity release is the best option, speak to one of our experts on the Money Helpline
- For alternative options, take a look at our guide to annuities
- Take a look at our expert guide to tax allowances for older people
