Last updated 11th June 2019
If you’re looking to boost your retirement income, but don’t fancy downsizing, equity release could be right for you. When even some potential downsides of equity release have their upsides, it’s worth taking a balanced look before you decide.
Releasing equity certainly has its benefits and is an increasingly popular choice for those looking to free up tax-free cash from their home to enjoy in later life. So it’s important to weigh up these potential pitfalls against the many advantages of equity release.
Equity release can end up costing more
While equity release can be a great way to boost your income in retirement, in the long run, it could end up being a more costly option than downsizing – boosting your income with the profits gained from moving to a smaller, cheaper home instead. And there are two big reasons why…
Interest can mount up over time
While there are types of equity release plans where you can choose to pay the interest as you go, the most popular kind of equity release - the lifetime mortgage involves the interest being added to your loan amount and the grand total being paid off through the sale of your home when you die or go into long-term care. This interest can mount up over the years reducing how much, if any, of the value of your home will benefit those you leave behind.
You could miss out on house price rises
This issue crops up with a type of equity release known as home reversion, which involves selling a share of your home to a provider in return for a cash sum. (It doesn’t affect lifetime mortgage plans, where you keep 100% home ownership.)
This means, if for example you sold a 40% share of your home, you wouldn’t benefit from any rise in property value on that share when your home is eventually sold. Effectively, you’d only get 60% of the profits of any future price rises.
Don’t leave yourself short
If you’re relying on your home as a means to fund retirement or later-life care, you’ll want to consider how much you decide to release now. You may want to help your children get on the property ladder, but be sure to think about your future needs first.
You can’t put a price on enjoying happy memories in your own home during your retirement. With equity release you get the benefits of unlocking cash for a more comfortable life while also getting to stay in your home. Staying in your home also means you can avoid the stresses of moving, which comes with selling your home, finding somewhere smaller, and moving all your things.
The other good news is the independent expert advisors you’ll talk to through SunLife are members of the Equity Release Council and you’ll also get a ‘no negative equity guarantee’ with any lifetime mortgage. This means you’ll never owe more than the value of your home, no matter how much interest builds up.
With a lifetime mortgage equity release plan (rather than a home reversion type), you also get to keep ownership of your home, meaning you avoid completely the potential pitfall of missing out on any house price rises. When your home is eventually sold after you die or permanently move into care, any increase in the value of your home will directly benefit your estate, if there’s anything left after your loan has been paid off.
You might not be able to release as much as you think
You can release equity from the age of 55, but there are limits. While you may have a lot of equity tied up in your home, the amount you can actually unlock depends on your age and surveyed property value.
The maximum you can borrow is 60% of the value of your home. But to give you an idea of the age limitations, an average borrower in their late sixties would only be allowed to release 35% of their home’s value through equity release.
Providers tend to ‘discount’ the amount of equity you can release based on how long they estimate they’ll have to wait for the loan to be repaid. So, generally speaking, younger, healthier applicants will be able to borrow less proportionally.
Remember, any cash you unlock using equity release is 100% tax free and yours to spend however you want once any existing mortgage is repaid. Maybe you’d like to make home and garden improvements? Or perhaps there’s a dream holiday you’ve always wanted to take?
Even though you may not be able to release all the equity in your home, the money you get could make a huge difference to your quality of life in retirement – and provide a welcome income boost you wouldn’t otherwise have.
See how much you could release with our handy online equity release calculator.
Equity release will affect your state benefits
Unlocking cash from your home will reduce the value of your estate and, by maintaining any unspent funds, you could affect your entitlement to means-tested state benefits – such as pension credit, savings credit or even council tax benefit.
Even if you’re not entitled to these benefits now, think carefully about whether you may need them in the future.
It’s important to weigh up any potential loss in benefits with the inherent benefit you’ll get from equity release. Namely, the extra financial freedom you’ll enjoy from having added disposable funds available, whenever you need it and available to spend on whatever you want.
Consider with your financial adviser whether equity release would provide you with enough cash to cover the loss of any benefits and still leave you with cash left over for other things.
There are rules to follow
While it is possible to move house after taking equity release, there are rules and criteria you need to stick to, and some equity release deals can be pretty inflexible. If the house you move to doesn’t meet the criteria set out by your provider, you may have to repay the equity release loan when you move.
Providers will also have rules regarding the upkeep of your existing home. After all, the money they lend you will have to be repaid by the sale of your home, so it’s in their interest to ask you to continue to maintain your home.
Rules can affect who gets to stay in your home after you die or move into long-term care. If you take out a joint equity release plan with your spouse, this isn’t normally a problem – your home won’t be sold to pay off your loan until after the second partner dies or moves into care. Where you can run into problems is if someone moves in with you after you take your plan, or if you have other family members living in your home. You’ll need to check with your equity release provider whether these people are entitled to stay in the home after you’ve gone.
While having to stick to rules and criteria set out by your equity release provider can sound like a hassle you could do without, many of the stipulations providers make are actually perfectly reasonable. Things like keeping your home up to a certain standard of repair and making sure, if you want to relocate, the home you’re moving to is up to standard too.
And remember, with equity release you can choose to have no monthly repayments during your lifetime. In many ways, these ‘rules’ are a small price to pay to have nothing to pay.
Equity release will affect your inheritance plans
With any equity release plan, the sale of your home is used to pay off what you owe, meaning there’s less left over to leave to family and loved ones. With lifetime mortgage plans, you still own your home so you can benefit from potential increases in house prices or you can opt to ringfence a proportion of your homes value as inheritance for your family. In the case of a home reversion plan, if you’ve sold 100% ownership of your home, they won’t get anything from you home as inheritance.
All equity release plans recommended through The SunLife Over 55 Equity Release Service are protected by the no negative equity guarantee. This means, no matter how much interest builds up on your loan – or if house prices drop over time – you’ll never have to repay more than the value of your home.
So, whatever happens, you can be assured that your family and loved ones will never be left with any debt from your equity release plan.
Take a closer look in our feature on the pros and cons of equity release.
Get the right advice
At SunLife, we’ve been working with people over 50 for more than 200 years – and we’ve learned to focus on what works best for our customers. The SunLife Over 55 Equity Release Service will put you in touch with an independent expert adviser to ensure you get the specialist advice you need before you make any big decisions.
The impartial advisers you’ll talk to are members of the Equity Release Council, and fully regulated by the Financial Conduct Authority (FCA), The UK’s Financial Regulatory body, dedicated to the fair treatment of customers that have regulated the Equity Release market since 2004.
This article focusses on a lifetime mortgage. To understand the features and risks and alternative types of equity release, speak to your independant expert adviser and ask for a personalised illustration.