Whether you’re looking to bolster your retirement income or offer financial support to your children and grandchildren, releasing some of the equity in your home could seem like an attractive option.

Indeed, research reported by IFA Magazine has revealed that three in five UK homeowners are interested in releasing money from their property to meet various financial needs in later life.

However, everyone’s circumstances and ambitions are different, so it’s worth taking a careful look at your financial plan before deciding if equity release is right for you.

Read on to learn more about how equity release works and discover the potential pros and cons of raising capital in this way.

Equity release could allow you to release cash from your home without having to sell

Equity release allows you to take some of the money you have tied up in your home as either a lump sum or in a series of smaller amounts over time.

Perhaps you’d like to make significant home improvements or maybe you need to cover medical costs for yourself or a family member.

Whatever your motivation for releasing some of the equity from your home, the first step is checking to see if you’re eligible.

You’ll need to ensure you meet your lender’s eligibility criteria

Equity release isn’t available to everyone. You must meet your lender’s eligibility criteria, which might include the following requirements:

  • You must be aged 55 or over – some lenders require you to be over 60 for certain products
  • Your property must be in the UK and it must be your main residence
  • You must own your property
  • Your home must meet your lender’s minimum standards of condition and value
  • Your home must be an eligible property type and construction.

It’s important to note that these are general criteria and each lender will set their own rules. For example, some lenders in England may not cover properties in Northern Ireland.

So, it’s important to check the eligibility criteria carefully.

You may benefit from speaking to a financial planner who can help you assess your financial situation, discuss your retirement goals, and explore the equity release options available to you.

2 ways to release tax-free cash from the equity in your home

Lifetime mortgage

The most popular way to use equity release is to take out a lifetime mortgage. This allows you to take a tax-free lump sum from the equity in your home while still retaining ownership.

One of the benefits of a lifetime mortgage is that there are usually no regular repayments to make. Instead, the interest rolls up over the course of your loan, so the final balance will include the original amount you borrow plus interest.

That said, you could choose to repay some of the interest on your loan each month to reduce the final balance due.

Fortunately, if you take out a lifetime mortgage with a member of the Equity Release Council (ERC), you’ll receive a “no negative equity” guarantee. This means that the amount you repay will never exceed the value of your home.

Plus, you’ll usually only repay the loan when you die or move into long-term care.

Home reversion

Alternatively, you could opt for a home reversion plan. These are usually only available once you’re aged 60 or older.

A home reversion allows you to sell a portion of your property to the mortgage lender in exchange for a lump sum and the right to live in your home under a lifetime lease until you die or move into long-term care.

Your lender won’t take any money out of your home until it is sold. However, you’ll need to follow the terms of their lease and there may be ongoing payments to make, such as ground rent.

It’s also important to note that lenders usually pay less than market value for their share of your home.

The potential pros and cons of equity release

Everyone has unique needs and circumstances, so it’s important to consider the potential pros and cons of equity release to decide if it’s a good choice for you.

Pros

  • You can stay in your home while releasing the cash you need to meet your needs.
  • The money you receive from equity release is exempt from Income Tax and Capital Gains Tax.
  • If you take out an ECR-approved lifetime mortgage, you’ll receive a “no negative equity” guarantee.
  • Usually, there are no monthly repayments to pay until you die or enter long-term care.
  • You could take out inheritance protection to ringfence part of your property to pass on.
  • If you opt for a lifetime mortgage and retain ownership of your home, you could still benefit from any subsequent rise in its value.
  • You could reduce a potential Inheritance Tax bill by giving some or all of the money you release to loved ones using your annual gifting allowances and exemptions.

Cons

  • Interest typically rolls up and compounds over the loan’s lifetime so your debt might increase.
  • You might not meet the eligibility criteria for equity release.
  • Equity release could reduce the value of the estate you pass on to your beneficiaries.
  • The interest rates on lifetime mortgages are typically higher than those on traditional mortgages.
  • You could lose certain means-tested benefits such as Pension Credits and Council Tax reductions.

There’s a lot to think about when you’re considering equity release. While it can be a useful way to release capital, it’s not always the right choice for everyone.

A financial planner can help you explore the equity release options available to you, alongside alternatives such as downsizing.

Ultimately, whether equity release is right for you depends on what you’re trying to achieve and how this aligns with your long-term goals.

Get in touch

If you’d like to know more about the equity release options available to you and how these might align with your retirement goals, please email us at hello@intelligentpensions.com or call 0800 077 8807.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate estate planning.

Equity release will reduce the value of your estate and can affect your eligibility for means-tested benefits.

A lifetime mortgage is a loan secured against your home. To understand the features and risks, ask for a personalised illustration.